WrS  UC-NRLF 

II  111* 

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Fire  Underwriters'  Associations 
in  tte  United  States 


By  ROBERT  RIEGEL 


THESIS 


Presented  to  the  Faculty  of  the  Graduaj  e  School  of 
THE  University  of  Pennsylvania  in  Partial  Fulfil- 
ment of  THE  Requirements  for  the  Degree  of 
Doctor  of  Philosophy 


The  Chronicle  Co.,   Ltd. 
1916 


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IT.' 


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Fire  Underwriters'  Associations 
in  the  United  States 


By  ROBERT  RIEGEL 


THESIS 

Presented  to  the  Faculty  of  the  Graduate  School  of 
THE  University  of  Pennsylvania  in  Partial  Fulfil- 
ment OF  the  Requirements  for  the  Degree  of 
Doctor  of  Philosophy 


The  Chronicle  Co.,   Ltd. 
1916 


"^^1 


A  SURVEY  AND  CLASSIFICATION  OF  FIRE  UNDERWRITERS'   ASSO- 
CIATIONS IN  THE  UNITED  STATES 


By  Robert  Riegel 
Whartcn  Schcol  of  Finance  and  Commerce,  University  of  Pennsylvania 

ALL  text  writers  have  emphasized  the  importance  of  fire  insurance  as  a 
business  necessity  and  if  a  more  decided  proof  be  desired  one  need  only 
consider  the  many  State  investigations  of  this  economic  factor.  (Oi 
the  entire  insurance  field  the  most  important  division  is  that  of  rate-making  or 
premium  fixing,  and  yet  one  of  tne  principal  agencies  exercising  this  function 
has  received  comparatively  little  attention  by  writers.  The  term  "premium"  in 
fire  insurance  refers  to  tne  amount  paid  by  one  having  an  interest  in  property 
to  an  insurer,  in  return  for  a  promise  of  reimbursement  for  damage  to  the 
property  by  fire.  Dwellings  and  mercantile  buildings,  with  their  contents, 
form  the  bulk  of  the  property  insured,  and  the  premium,  or  the  amount  paid  for 
insurance,  is  a  matter  of  importance  to  the  community  as  regards  both  home 
and  business  relations.  It  is  included  in  the  expenditures  of  families,  firms 
and  corporations.  From  fire  premiums,  in  the  last  analysis,  losses  are  paid. 
Many  policyholders  yearly  contribute  small  amounts  which  are  paid  out  to  the 
unfortunate  to  settle  losses,  and  if  losses  increase,  premiums  must  increase,  or 
the  claims  ultim.ately  fail  to  be  paid.  Fire  insurance  premiums,  since  fire  insur- 
ance is  a  necessity  of  business,  and  almost  a  necessity  of  life,  are  of  vital 
importance  to  all,  and  this  is  also  true  of  the  property  loss  by  fire,  because  of 
its  effect  upon  premiums.  That  losses  be  as  small  as  possible,  and  that  insur- 
ance premiums  be  adequate,  fair  and  consistent,  are  both  to  the  interest  of  the  v  > 
American  public.  In  spite  of  the  fact  that  premiums  and  losses  are  of  such  ^ 
vital  importance  the  institutions  most  closely  connected  with  them — under- 
writers' associations — have  received  practically  no  notice  except  individually 
by  committees  of  investigation. 

The  amount  of  premJum  paid  depends  upon  the  amount  of  insurance  car- 
ried and  the  rate.  The  rate  is  the  premium  per  $100  of  insurance,  and  criticism 
of  the  rates  of  fire  insurance  companies  is  not  new.  It  has  probably  existed 
since  the  inception  of  the  business,  although  in  its  early  stages  most  people  y^ 
considered  that  rates  were  kept  at  a  minimum  because  of  the  existence  of  com- 
petition. Criticism  has  doubtless  had  its  good  effect  in  the  improvement  of  the 
methods  of  rating,  from  the  time  when  insurance  was  on  "common,"  "haz- 
ardous" or  "doubly  hazardous"  properties  to  the  era  of  the  modern  schedule, — 
when  it  has  been  based  upon  sound  premises.  At  other  times,  however,  it  has 
resulted  in  the  passage  of  laws  which  have  injured  the  insurance  business,  the 
policyholders  and  the  public.  Valued  policy  laws  were  passed,  requiring  insur- 
ance companies  to  pay,  upon  the  destruction  of  a  building,  the  amount  named 
in  the  policy  regardless   of  depreciation  since  the  underwriting  of  the  risk. 

3 

361270 


Under  such  statutes  it  was  to  the  insured's  advantage  to  have  his  building 
I  destroyed  and  he  made  a  profit  thereby.  Anti-compact  laws  came  into  exist- 
•  ence,  forbidding  combinations  in  the  fixing  or  maintaining  of  rates.  By  the 
\  passage  of  such  laws  States  refused  to  permit  combination,  which  was  eliminat- 
\    ing  the  discrimination  in  rates  which  had  resulted  from  competition.* 

Rate  criticism  has  lately  assumed  a  new  phase,  however,  induced  by  the 
iharacter  of  the  means  used  to  obtain  rates,  namely,  underwriters'  associa- 
tions. No  longer  do  we  have  all  the  companies,  influenced  by  competition, 
reducing  their  rates  to  the  lowest  point  consistent  with  their  loss  statistics,  or 
even  lower,  or  arriving  by  separate  processes  at  the  final  rates  which  they 
grant  on  properties.  They  instead  co-operate  to  centralize  the  control  of 
rates — place  the  power  with  associations  in  which  they,  among  others,  are  rep- 
resented; and  to  the  new  methods  the  critics  find  new  objections.  It  begins  to 
appear  as  if  rates  might  be  placed  at  any  point  the  companies  choose  and 
thereby  become  exorbitant.  Competition  eliminated,  what  check  on  confisca- 
tion exists?  Were  the  rates,  promulgated  by  the  associations  with  the  help 
of  local  schedules,  optional,  there  would  be  no  room  for  adverse  criticism,  but 
they  are  of  little  value  if  not  enforceable.  The  money  spent  in  obtaining  a 
rating  on  a  building  would  be  wasted,  if  through  competition  a  company  were 
forced  to  discard  the  rate  for  a  lower  one.  The  present  question,  therefore,  is 
not  only  whether  rates  shall  be  higher  or  lower,  as  may  superficially  appear, 
but  is  also  one  of  method.  Shall  they  be  determined  by  competition  or 
co-operation  ? 

The  Instruments  of   Rate-Making. 

Many  important  insurance  rates  in  the  United  States  to-day  are  arrived 
at  by  the  use  of  "schedules"  such  as  the  Dean  or  Analytic  Schedule  and  the 
Universal  Mercantile  Schedule.  Such  schedules  set  forth  the  various  disad- 
vantages and  good  features  in  building  construction,  location  and  occupancy, 
with  their  respective  additions  to  or  deductions  from  a  "basis  rate."  This 
basis  rate  is  the  rate  for  a  standard  building  in  a  standard  city,  according  to 
the  Universal  Schedule,  and  under  the  Dean  Schedule  for  an  "ordinary"  build- 
ing, which,  however,  is  better  than  the  majority  of  those  in  existence.  Few  or 
many  items  may  be  considered  in  such  schedules,  and  they  vary  from  the  short 
schedule  used  in  New  England,  containing  17  items,  to  the  Universal  Schedule 
with  3,400  items,  including  occupancy  charges.  By  the  use  of  schedules  the 
following  advantages  are  derived  :t 

1.  Consistent  and  equitable  rating. 

2.  Accurate  rating,  by  taking  into  account  each  feature  of  construction. 


*In  1912  anti-compact  laws  existed  in  the  following  States:  Alabama,  Arizona, 
Arkansas,  California,  Georgia,  Iowa,  Kansas,  Louisiana,  Michigan,  Mississippi,  Mis- 
souri, Nevada,  New  Hampshire,  New  Mexico,  Ohio,  Oklahoma,  Oregon,  South  Dakota, 
Tennessee,  Texas.  Washington,  Wisconsin,  (The  Fire  Insurance  Pocket  Index,  1913. 
Spectator  Company,  New  York,  p.  75).  For  the  de^velopment  of  such  legislation  see  the 
author's  "Commonwealth  versus  Co-operation,"  THEi  MARKET  WORLD  AND 
CHRONICLE,  June  12,  1915,  or  the  same,  "Rough  Notes,"  April  22,  1915. 
tStandard    Universal    Schedule   for   Rating   Mercantile   Risks,    page   8. 


3      As  a  consequence  of  the  above,  the  prevention  of  opposition  on  the 
part  of  policyholders  and  legislators. 

4.  Encouragement  of  proper  construction.  ^  -, 

5.  Tendency  to  prevent  anti-compact  laws. 

6.  Discouragement  of  excessive  brokerages  and  commissions. 

7.  More  thorough  inspection.  ^  \, 

8.  Prevention  of  excessive  deductions  for  fire  departments. 

9.  Prevention  of  competition  and  rate-cutting. 

The  schedule  having  been  prepared  with  as  great  scientific  accuracy  as  is 
possible  under  present  conditions,  it  is  unnecessary  for  a  company  to  prepare 
its  own  rating  system,  except  for  certain  risks  out  of  the  ordinary  on  which l 
it  may  grant  insurance.  The  companies  first  co-operate,  again  as  far  as  is) 
possible  under  present  conditions,  in  furnishing  data  for  the  compilation  of  I 
such  a  schedule,  and  once  worked  out,  collectively  adopt  it  as  a  basis  for  their 
business.  Many  schedules  are  used,  but  they  usually  follow  the  principles  of 
the  Dean  or  the  Universal  Schedule,  with  adaptations  for  local  conditions. 

The  Application  of  the  "Schedule." 

Having  then  a  schedule,  some  human  agency  must  be  employed  to  apply 
it  to  the  various  risks.  Obviously  each  company  might  individually  employ 
raters  to  apply  the  schedule,  but  if  there  were  two  hundred  companies  doing 
business  it  would  be  folly  to  employ  two  hundred  agencies  to  apply  the  schedule 
in  a  given  locality  when  one  might  do  it  for  all.  The  companies  therefore 
quite  naturally  co-operate.  If  each  company  was  compelled  to  inspect  each 
building  for  itself,  the  expense  of  transacting  business  would  be  increased,  ' 
with  the  result  that  premiums  would  be  higher,  to  the  detriment  of  those  who 
must  purchase  insurance.  The  agencies  which  the  companies  establish  in  most 
communities  to  apply  the  schedules  for  them  and  so  make  the  rates,  are  associa- 
tions variously  known  as  "underwriters'  associations,"  **fire  insurance  ex- 
changes," "unions,"  and  "tariff  associations." 

State  laws,  however,  sometimes  intervene  to  prevent  the  companies  from 
using  the  underwriters'  associations  to  make  the  rates.  In  January,  1912,  for 
example,  a  bill  was  introduced  in  the  Legislature  of  South  Carolina  to  expel 
from  the  State  companies  which  were  members  of  the  Southeastern  Under- 
writers' Association,  In  some  instances  the  laws  impose  such  penalties  as 
prohibit  companies  from  membership  in  such  organizations.  In  1897  the  State 
of  Alabama  passed  a  law  stating  that  if  property  insured  under  a  policy  issued 
by  a  company  which  was  a  member  of  any  tariff  or  rating  association  was 
destroyed,  the  owner  thereof  might  recover  the  actual  amount  of  loss  or 
damage,  and  in  addition,  twenty-five  per  cent  of  such  loss  or  damage.  The 
latter  amount  was  a  penalty  imposed  for  the  company's  membership  and 
participation  in  such  an  association. 

After  the  passage  of  such  laws  the  companies  resorted  to  another  device 
to  enjoy  the  co-operation  thus  denied  but  which  is  necessary  in  the  making  of 
rates.  Some  party  in  a  given  territory  made  the  rates  and  sold  them  to  the  com- 
panies there  operating.  These  parties  were  known — for  obvious  reasons — as  "in- 
dependent raters,"  although  the  term  is  a  misnomer.    It  is  quite  plain  that  the 


independent  rater  is  a  device  employed  by  the  companies  to  do  that  which  may 
not  legally  be  accomplished  through  underwriters'  associations.  It  is  useless 
to  co-operate  in  making  or  purchasing  rates  unless  such  rates  are  adhered  to. 
These  purchased  rates  were  given  to  a  stamping,  office,  usually  a  department  of 
an  association,  and  the  stamping  office  had  the  sole  power  to  permit  a  change 
of  rates.  This  was  accomplished  by  the  passage  of  a  "relief  rule."  By  such 
supervision  the  rates  published  are  maintained.  The  New  York  Fire  Insur- 
ance Exchange  made  rates  for  a  certain  portion  of  the  State  of  New  Jersey 
up  to  December  16,  1909,  at  which  time  it  was  forced  to  relinquish  this  function 
by  a  decision  of  the  New  Jersey  Court  of  Errors  and  Appeals,  declaring  com- 
binations to  fix  rates  ultra  vires,  since  this  was  an  important  duty  of  the 
officers  of  insurance  companies,  and  could  not,  under  the  charters  of  the 
latter,  be  delegated  to  an  association.  The  New  York  Exchange  then  sold  its 
maps  and  surveys  to  an  employe,  who  resigned  his  position  with  the  Exchange 
and  organized  the  "Hudson  Inspection  Bureau,"  which  promulgated  advisory 
rates  in  what  was  formerly  the  territory  of  the  Exchange.  Differences  between 
Exchange  members  affecting  this  territory  were  still  settled  by  the  procedure 
of  the  Exchange. 

The  foregoing  briefly  shows  the  connection  of  these  associations  with  the 
vital  insurance  function  of  rate-making. 

Types  of  Associations.! 

Underwriters'  associations  may  be  divided  into  types  or  classified,  (1)  on 
the  basis  of  the  extent  of  territory  in  which  they  operate;  (2)  according  to 
their  functions  or  objects;  and  (3)  with  reference  to  the  character  of  mem- 
bership. 

CLASSIFICATION    OF    ASSOCIATIONS 

According    to — 

r  National 

1.  Jurisdiction J  Sectional 

Local 


fUr 
I  Su 


rban 
burban 


2.   Functisns. 


3.   Membership, 


Occupation 
of  members 


Classification 
of  members 


Requirements 


Teclinicai    and    educational 

Regulation   of  brokers  and   agents  and   rate-making 

f  Company    representatives 
Special    agents 
Agents  and   brokers 
No  distinction   between   members 

r  1.   Without   qualification 
I       of   voting   power 


Classified 
membership 


tSee  J.  B.  Kremer,  "The  Agency, 
Insurance  Society  of  New  York. 


2.  With    qualification    of 
voting   power. 

^  Adherence  to  agreed   commissions  to  agents 
Adherence  to  stated  scale  of  brokers' 
compensation 

an  address  at  the  Ninety-first  Meeting  of  the 


Types  of  Associations. 
According  to  territory,  the  various  organizations  may  be  divided  as  follows : 

1.  Local. 

(a)  Urban. 

(b)  Suburban. 

2.  Sectional. 

3.  National. 

While  the  last  two  terms  are  to  an  extent  self-explanatory,  "local"  is 
somewhat  misleading,  giving  the  impression  of  a  small  unimportant  body  in  a 
very  restricted  territory.  It  may,  however,  apply  to  organizations  concerned 
with  the  largest  cities,  to  those  with  jurisdictions  extending  beyond  city  limits, 
or  to  those  within  a  city  proper,  with  suburban  territory  excluded.  The  New 
York  Fire  Insurance  Exchange  has  no  jurisdiction  over  suburbs,  these  being  the 
territory  of  the  Suburban  Fire  Insurance  Exchange,  but  its  activities  extend 
beyond  the  city  of  New  York  proper. 

Local  associations  might  be  subdivided  into  urban  and  suburban,  therefore, 
the  city  of  New  York  furnishing  an  example  of  such  division  of  territory.  The 
Suburban  Fire  Insurance  Exchange  there  extends  over  Westchester,  Putnam, 
Rockland  and  Richmond  counties,  the  Bronx  east  of  the  Bronx  River,  and  all  of 
Long  Island  outside  of  the  Borough  of  Brooklyn;  while  the  New  York  Fire 
Insurance  Exchange  supervises,  roughly,  Manhattan,  the  Bronx  and  Brooklyn. 
Similar  instances  might  be  cited  elsewhere. 

Other  local  associations  operate  within  a  single  State,  but  with  jurisdic- 
tions ranging  from  two  or  three  counties  to  almost  an  entire  State.  The  type 
in  mind  is  best  described  by  illustrations.  The  Allegheny  County  Underwriters* 
Association  covers  several  counties  in  the  western  part  of  the  State  of  Penn- 
sylvania, and  is  one  therefore  with  a  comparatively  limited  area.  The  Under- 
writers' Association  of  New  York  State  has  a  broader  field,  covering  all  of  the 
counties  north  of  Putnam  and  Westchester,  with  the  large  cities  excepted. 
These  two  kinds  of  associations  are  both  included  under  the  term  local  to  avoid 
a  too  elaborate  classification,  as  they  are  somewhat  similar  in  other  respects. 
The  local  associations,  although  operating  in  a  smaller  field  than  the  sectional 
and  national,  are  extremely  important  by  reason  of  the  character  of  the  work 
they  perform — supervising  brokers,  agents  and  rates. 

The  sectional  organizations'  territories  are  wider  in  extent,  and  cover  from 
two  or  three  States  to  half  of  the  United  States.  The  Eastern  Union  covers 
that  part  of  the  country  east  of  the  Mississippi;  the  Western  Union,  broadly 
speaking,  the  Middle  West;  and  the  Middle  Department  operates  in  Pennsyl- 
vania, Delaware,  Maryland  and  West  Virginia.  Such  organizations  perform,  in 
a  broader  way,  somewhat  the  same  functions  as  the  local  associations,  in  terri- 
tory not  covered  by  the  latter.  The  Eastern  and  Western  Unions  are  what  may 
be  termed  "company"  organizations,  their  principal  object  being  the  equalization 
of  commissions.  The  interests  of  the  field  force  may  be  directly  opposed,  there- 
fore, to  the  interests  of  these  two  unions,  as,  for  example,  when  reduction  of 
commissions  is  desired.  These  co-operative  bodies  have  considerable  influence 
with  the  local  boards  which  make  rates,  since  some  of  the  latter  owe  their  very 


existence  to  the  endeavor  of  the  sectional  unions.  The  local  associations,  how- 
ever, must  not  be  considered  as  branches  of  these  larger  bodies,  for  a  company 
may  be  represented  m  a  local  underwriters'  association  or  many  of  them,  and 
at  the  same  time  not  be  a  member  of  the  Unions.  The  connection  between  the 
different  classes  is  indirect,  but  nevertheless  exists.  The  Middle  Department, 
however,  is  a  special  agents'  organization,  and  is  similar  in  nature  to  the  local 
bodies,  having  for  its  objects  the  making  of  rates,  inspection  of  policies,  estab- 
lishment of  a  stamping  department,  and  the  regulation  of  commissions.  Many 
of  the  local  boards  in  the  territory  of  the  Middle  Department  have  been 
organized  through  the  activity  and  influence  of  this  body.  It  makes  agree- 
ments with  local  bodies,  for  example,  with  regard  to  rates  and  commissions. 

There  are,  in  the  main,  two  fields  of  activity  in  which  underwriters'  associa- 
tions engage,  namely,  efforts  to  improve  the  practices  of  the  business,  and, 
secondly,  measures  which  may  be  termed  educational.  Insurance  may  be 
viewed  from  one  standpoint  as  the  furnishing  of  indemnity  for  a  proper  con-» 
sideration;  or  in  a  broader  light,  as  having  also  a  duty  to  teach  the  methods 
of  reducing  fire  waste,  as  a  doctor  points  out  means  of  avoiding  illness.  The 
educational  activities  of  the  associations  are  directed  toward  the  fulfilment  of 
the  latter  duty. 
,  The  local  and  sectional  associations  are  in  the  main  concerned  with  the 

i  practical  aspects  of  the  business,  and  the  national  bodies  with  the  educational 
j  aspects.    The  practical  bodies  are  chiefly  concerned  with  the  subjects  of  rates 
i  and  commissions,  while  the  educational  bodies,  the  National   Board   of   Fire 
:  Underwriters  and  the  National  Fire  Protection  Association,  direct  their  efforts 
i  toward  preventing  and  reducing  fire  waste.    This  division  of  function  must  not 
be  too  much  emphasized,  for  the  local  and  sectional  bodies  are  also  greatly 
interested  in  the  educational  or  conservation  work.     The  Middle  Department, 
for  example,  makes  inspections  and  furnishes  the  advice  of  engineers,  and  the 
constitutions  and  by-laws  of  many  of  the  local  associations  include  in  the  list  of 
objects  of  association  "the  reduction  of  fire  waste"  and  "the  improvement  of 
construction."     Likewise  the  proper  measurement  of  fire  hazard,  an  object  of 
local  associations,  is  in  itself  one  of  the  strongest  influences  in  discouraging 
poor  construction   and   in   encouraging   proper  building   and   the   use   of  fire- 
extinguishing  facilities.     The  National  Board,  on  the  other  hand,  has  recently 
undertaken  the  preparation  of  a  new  schedule  rating  system.     (See  p.  20.) 

The  national  association  (National  Board  of  Fire  Underwriters)  and  some 

sectional   organizations    (Eastern   and   Western   Unions,   Underwriters'   Asso- 

I  elation   of  the   Pacific,   Rocky   Mountain  Fire   Underwriters'  Association   and 

I  Southeastern  Tariff  or  Southeastern  Underwriters'  Association)   are  company 

I  organizations,  and  comprise  practically  all  the  large  stock  companies  in  the 

United  States.    Other  sectional  organizations  (the  New  England  Fire  Insurance 

Exchange  and  Underwriters'  Association  of  New  York  State,  for  example)  are 

composed  of  special  agents.     The  local  associations'  membership  is  personal, 

consisting  of  managers,  agents  and  brokers. 

In  some  associations  membership  is  divided  into  classes.  Thus  in  the 
Board  of  Underwriters  of  Allegheny  County  three  classes  of  members  are 
included;  agents  who  write  more  or  less  than  $5,000  net  premiums  annually. 


and  brokers.     In  this  association,  also,  the  voting  privilege  of  the  latter  two 
classes  is  qualified. 

Some  of  the  organizations  require  members  to  adhere  to  a  stated  commis- 
sion rate.  Notable  examples  are  the  Eastern  and  Western  Unions.  The  fol- 
lowing table  gives  an  outline  of  the  nature  of  some  of  the  more  important 
boards  and  bureaus  :§ 


Cate  of  Extent 

Organi-  of  Juris- 

;zation.       Name    of    Association,  diction. 
1866     National    Board    of    Fire 

Underwriters  National 


1879     Western  Union 


Eastern    Union 


Sectional 


Sectional 


11897     Underwriters'      Associa-     Sectional 
tion  of  the  Pacific 


■1889     Rocky      IVIountain      Fire     Sectional 
Underwriters'    Assoc- 
iation 

11882  Southeastern  Tariff  As-     Sectional 

sociation 

11883  New    England    Insurance     Sectional 

Exchange 
-d883     Underwriters'      Associa-     Sectional 

tion  of  New  York  State 
■1883     Underwriters'      Associa-     Sectional 

tion      of      the      Middle 

Department 
11899     New    York    Fire     insur-      Local 

ance   Exchange 


11883     Philadelphia    Underwrit-      Local 
ers'  Association 


Functions.!! 
Educational 
work 
Technical 
studies 

Formation    of 
local    boards, 
regulation    of 
agents    and 
supervision    of 
rates 

Regulation  of 
agents,   promo- 
tion  of  good 
practices 
Regulation    of 
brokers  and 
agents,  promul- 
gation  of   rates 
Ditto 


Ditto-forma- 
tion   of    local 
boards 
Ditto 


Ditto 
Ditto 


Regulation    of 
brokers   and 
agents,    pro- 
mulgation   of 
rates 

Ditto 


TlOnly  the  most  important  and  distinctive  functions  are 
jplete  description   of  purposes  and  services  follows  In  Jater 


Membership 
Composed  of 

Companies 


Companies 


Companies 


Companies 


Companies 


Companies 


Special 
Agents 
Special 
Agents 
Special 
Agents 

Agents  and 
Brokers 


Agents  ano 
Brokers 

here  given.     A 
sections. 


Remarks. 


Observance 
of  agreed 
commission 
required 


Ditto 


Ditto 


Ditto 


Ditto 


more  com- 


§lt   need   hardly   be   stated   that  these  were  chosen  for  no   purpose  other  than  to 
Iillustrate  the  nature  of  the  classes  they  represent. 


Having  briefly  indicated  the  general  nature  of  the  various  classes  of 
associations,  later  sections  discuss  in  detail  the  character  and  function  of — 

(1)  The  National  organizations,  of  which  the  National  Board  of  Fire 
Underwriters  and  the  National  Fire  Protection  Association  are  perhaps  the  most 
influential. 

(2)  The  Sectional  organizations,  namely,  the  Eastern  Union,  Western. 
Union  and  Western  Insurance  Bureau,  and, 

(3)  The  local  bodies. 


LOCAL  FIRE  UNDERWRITERS'  ASSOCIATIONS* 


Jurisdiction,  Membership  and  Government. 

OF  all  the  underwriters'  associations  the  local  type,  because  of  the  num- 
ber of  such  bodies  and  the  character  of  their  activities,  is  the  most 
important.  Some  have  jurisdictions  which  are  limited  to  single  cities, 
often  excluding  even  suburban  territory.  Included  in  this  group  are  also  the 
suburban  exchanges,  which  are  not  relatively  so  important  as  the  urban,  because 
of  the  smaller  number  of  risks  within  their  control.  Taking  two  large  Eastern 
cities  as  examples,  there  are  the  New  York  Fire  Insurance  Exchange  and  the 
Philadelphia  Underwriters'  Association.  The  former  operates  in  substantially 
the  present  city  of  New  York,  exclusive  of  the  suburbs;  its  territory  includes,, 
therefore,  Manhattan,  Bronx  and  Brooklyn  boroughs,  and  in  addition  Long 
Island  City  and  the  American  Dock  piers  in  Richmond.  The  Philadelphia. 
Underwriters'  Association  has  jurisdiction  over  the  City  of  Philadelphia,  exclud- 
ing suburbs.  Both  of  these  are  unincorporated  and  voluntary  in  the  sense  that 
membership  is  not  compulsory,  but  is  very  advisable  from  a  business  stand- 
point. 

The  local  exchanges  are  in  many  cases  the  outgrowth  of  sectional  organiza- 
tions. Thus  the  New  York  Fire  Insurance  Exchange  was  organized  in  1899  ini 
pursuance  of  a  by-law  of  the  New  York  Board  of  Fire  Underwriters,  a  State- 
association,  to  the  effect  that  its  members  might  organize  rating  associations. 
Local    exchanges'    membership    is    usually    personal    and    includes    principally 


*The  facts  upon  which  this  section  are  based  were  derived  chiefly  from  the  fol- 
lowing sources: 

Report  of  Joint  Committee  to  Investigate  Insurance,  State  of  New  York,  Februaryr 
1,  1911. 

W.  O.  Robb,  "New  York  Fire  Insurance  Exchange,"  Popular  Insurance  Magazine,. 
January,  1911. 

Report  on  Examination  of  New  York  Fire  Insurance  Exchange,  July  21,  1913.  Newr 
York  State  Insurance  Department. 

New  York  Fire  Insurance  Exchange,  Annual  Reports  of  the  Manager. 

Handbook  of  the  New  York  Fire  Insurance  Pxchange,  July,  1910,  revised  to  Janu- 
ary, 1914. 

Philadelphia  Underwriters'  Association  By-Laws,  Agreements  and  Rules,  June-,. 
1908;  revised  to  1913. 

Wiedenhold,  Louis,  Jr.,  "Underwriters'  Associations,"  Bulletin  of  Fire  Insurance* 
Society  of  Philadelphia,  Special  Supplement,  May,  1912. 

10 


brokers  and  agents.  In  1911  the  New  York  Exchange  included  about  55  com- 
panies represented  by  officers  or  managers  and  about  the  same  number  of  head 
agents  representing  one  or  more  companies  in  the  territory  named. f  Prac- 
tically all  of  the  companies  admitted  to  the  State  of  New  York  and  doing  busi- 
ness in  New  York  City  are  represented  in  the  Association,  either  by  officers, 
managers  or  head  agents.  The  Philadelphia  Underwriters'  Association  is  sub- 
stantially of  the  same  nature. 

Membership  in  local  associations  is  obtained  by  application  in  writing, 
accepted  by  a  committee  appointed  for  this  purpose  and  usually  known  as  the 
Committee  on  Brokerage.  The  applicant  must  be  a  person  representing,  as 
officer,  broker  or  agent,  some  insurance  company  doing  business  in  the  terri- 
tory of  the  particular  association.  In  addition  he  must  comply  with  certain 
requirements  promulgated  by  the  committee  and  must  agree  to  be  bound  by 
the  constitution,  by-laws,  rates,  commissions  and  forms. 

Like  most  present-day  associations,  the  government  of  the  local  exchanges 
is  a  government  of  committees.  The  most  important  is  usually  an  Executive 
or  Governing  Committee,  which  is  in  general  control  of  all  activities  and  whose 
orders  are  executed  by  a  Secretary  or  Manager.  This  Committee, -which  is 
usually  elective,  appoints  various  standing  committees  to  take  charge  of  par- 
ticular branches  of  association  work.  The  Executive  Committee  of  the  Phila- 
delphia Exchange  consists  of  nine  members,  four  being  representatives  of 
Pennsylvania  companies,  three  of  companies  from  other  States  and  two  of 
foreign  companies.     Its  duties  are  the  following  :§ 

(1)  To  maintain  a  department  of  surveys  and  inspection. 

(2)  To  make  rates,  schedules,  standards,  etc.,  which  shall  be  binding  on 

all  members. 

(3)  To  prescribe  rules  and  forms  to  be  used. 

(4)  To  m.ake  alterations  in  rates  provided: 

(a)  A   change   takes   place   in    hazard   or   a   change   in    the   rates 

applicable  to  the  risk. 

(b)  A   minimum,   schedule   or   standard   is   adopted   which    did   not 

before  apply. 

(c)  An  error  has  been  made  in  the  application  of  a  schedule,  mini- 

mum, standard  or  rule. 

(d)  A  standard,  schedule  or  minimum  does  not  apply  to  the  risk. 

(e)  A  cause  is  stated  in  writing  and  is  one  of  these  named  above. 

(5)  To  fix  rates  on  risks  of  superior  construction. 

(6)  To  assess  companies  for  funds  to  defray  expenses.  The  assessment 
is  made  upon  the  basis  of  premium  income. 

A  large  portion  of  the  actual  work  of  an  association  is  performed  by  stand- 
ing committees  appointed  by  the  Executive  Committee.  The  most  important 
among  these  are: 

(1)  The  Committee  on  Rates,  which  in  the  New  York  Fire  Insurance  Ex- 


tw.  o.  Robb. 

§By-laws,  Agreements  and  Rules,  June,  190S;  revised  to  1913. 

11 


change  consists  of  seven  members  including  representatives  of  local,  agency 
and  foreign  companies.  This  Committee  has  charge  of  the  rating  work  of  the 
Exchange,  to  be  later  described.  To  some  extent  changes  in  rating  originate 
with  the  working  force,  but  the  control  and  direction  of  the  rating  department 
rest  ultimately  with  this  Committee.  It  is  virtually  a  court  of  appeals,  hearing 
testimony  on  the  application  of  schedules  to  particular  risks,  the  introduction  of 
new  schedules  and  the  revision  of  old  ones. 

(2)  The  Committee  on  Brokerage,  which  practically  determines  who  shall 
be  admitted  to  the  association,  investigating  applications  for  membership  and 
hearing  any  complaints  against  the  applicant.  If  the  candidate  is  considered 
a  satisfactory  person  and  has  complied  with  the  rules  for  admission  promul- 
gated by  the  Committee,  the  latter  issues  to  him  a  certificate  of  membership. 
Among  the  rules  prescribed  for  admission  are  usually  the  following :$ 

(a)  The  applicant  must  have  placed  at  least  two  risks  with  exchange 
companies,  covering  properties  of  two  different  parties,  neither  of  whom 
is  related  to  the  applicant.  The  premiums  thereon  must  have  been  paid 
in  full. 

(b)  The  applicant  must  be  favorably  endorsed  by  two  independent 
references,  one  of  whom  is  a  voting  member  of  the  Exchange. 

j  (c)    He  must  be  21  years  of  age  or  over. 

(d)  He  must  agree  that  he  will  not  give  rebates  or  accept  commissions 
in  excess  of  those  prescribed  by  the  Association. 

(e)  He  must  agree  to  place  all  risks  with  Exchange  members  unless 
sufficient  insurance  cannot  be  so  secured. 

In  addition  to  its  administration  of  admission  requirements  the  Brokerage 
Committee  acts  as  a  lower  court  to  investigate  complaints  against  members. 
The  accused  has  an  opportunity  to  appear  and  defend  himself,  but  if  convicted 
the  Brokerage  Committee  imposes  the  appropriate  penalty.  An  appeal  may  be 
taken  from  this  decision,  however. 

(3)  The  Committee  on  Arbitration.  A  member  receiving  an  adverse  de- 
cision from  the  Brokerage  Committee,  as  above  described,  may  take  an  appeal 
to  the  Committee  on  Arbitration  within  ten  days  of  the  mailing  of  notice  of 
such  decision.  This  right  of  appeal  is  so  restricted,  however,  as  to  make 
the  Brokerage  Committee  in  some  cases  a  court  of  final  judgment.  Thus 
in  one  association  the  latter  has  the  power  to  cancel  certificates  upon  ten  days' 
notice,  and  when  it  dismisses  a  member  in  this  manner  he  has  no  redress. 
Upon  other  appeals  the  Committee  on  Arbitration  investigates  the  complaint, 
having  power  to  examine  the  books  of  any  office,  agency  or  branch  office,  and 
any  person  connected  with  such  agency  or  office,  under  oath.  Refusal  to  testify 
or  submit  books  or  papers  is  considered  an  admission  of  the  truth  of  the  accusa- 
tion. Accountants  may  be  employed  to  assist  the  Committee.  Having  arrived 
at  a  conclusion,  the  decision  is  announced  and  a  penalty  imposed,  which  may 
consist  of  a  fine,  enforced  cancellation  of  any  policies  in  question  or  of  prevent- 
ing the  mfember  from  taking  a  particular  risk  or  risks,  either  directly  or  by 


^Examination  of  New  York  Fire  Insurance  Exchange. 

12 


reinsurance,  for  one  year.    The  last  penalty  is  a  serious  one,  as  it  may  involve 
considerable  loss  of  business,  which  possibly  will  never  be  recovered. 

(4)  The  Committee  on  Losses  and  Adjustments.  The  purpose  of  this  Com- 
mittee is  to  promote  good  business  practice  and  equity  in  the  adjustment  of  fire 
losses.  To  this  end  it  prescribes  rules  for  the  payment  of  claims.  Thus  some 
associations  on  the  Pacific  Coast  have  agreed  that  a  rule  known  as  the  Kinne 
Rule  shall  be  used  for  the  apportionment  of  losses  where  non-concurrent  insur- 
ance exists. 

The  Objects  of  Local  Associations. 

The  statement  of  the  objects  of  the  New  York  Fire  Insurance  Exchange 
may  be  taken  as  illustrative  of  the  general  expression  of  local  associations' 
purposes.    They  are  as  follows: 

1.  Mutual  counsel. 

2.  Comparison  of  experience  necessary  for  adequate  and  just  rates. 

3.  Economical  conduct  of  business. 

4.  Prompt  and  equitable  adjustment  of  losses. 

5.  Ascertainment  of  proper  and  safe  methods  of  building  construction. 

6.  Prevention  and  extinction  of  fires. 

7.  Promotion  of  mutual  interests  of  underwriter  and  property  owner. 

Of  the  purposes  enumerated  two  are  of  most  vital  importance — the  regula- 
tion of  brokers  and  agents  and  the  control  of  rates.  The  Joint  Committee  of 
the  New  York  Legislature  in  its  report  states  that  "The  object  of  the  Ex- 
change" (referring  to  the  New  York  Fire  Insurance  Exchange)  "is  the  control 
of  rates  and  commissions  to  agents  and  brokers";  which  perhaps  gives  an 
unfair  impression,  in  view  of  the  other  activities  of  this  body,  but  which  cer- 
tainly properly  emphasizes  two  of  the  most  important  functions. 

(1)  Regulation  of  Brokers  and  Agents.  One  of  the  main  objects  of  associa- 
tions is  to  require  the  adherence  by  brokers  and  agents  to  a  uniform  scale  of 
commissions.  Thus,  taking  New  York  as  an  example,  companies  may  com- 
pensate head  agents  or  managers  in  any  form  or  amount  they  choose.  Branch 
office  managers,  however,  receive  commissions  only  for  their  services,  these 
amounting  to  25  per  cent.  These  managers  are  authorized  to  write  insurance 
only  on  risks  of  a  less  hazardous  nature.  A  good  portion  of  the  25  per  cent  is 
turned  over  to  brokers,  and  the  managers  receive  in  addition  what  is  termed 
an  "over-riding"  or  excess  commission  of  12 1/^  per  cent.  For  this  is  substituted 
sometimes  a  contingent  commission,  depending  upon  the  profit  to  the  com- 
pany on  the  business  written  by  the  branch.*  Most  associations  provide  that  as 
regards  risks  located  in  the  territory  of  other  exchanges  members  shall  abide 
by  the  rules  of  the  latter. 

Brokers  receive  commissions  which  vary  with  the  class  of  business  written, 
ranging  from  5  to  25  per  cent,  as  follows: 

vl)  On  risks  rated  under  the  Restricted  Sprinkler  schedule,  5  per  cent. 
This  schedule  is  applicable  to  but  few  risks. 


*For  various  methods  of  compensation  see  G,   T.  Forbusli,   "Local  Agency  Com- 
pensation," a  lecture  before  Insurance  Library  Association  of  Boston.  1912. 

13 


(2)  On  risks  other  than  may  be  written  by  branch  offices,  (i.  e.,  preferred 

risks  of  a  less  hazardous  nature)   10  per  cent  (if  in  the  congested 
district  of  Manhattan). 

(3)  On  risks  outside  the  congested  district  of  Manhattan,  said  risks  not 

being  of  the  Branch  Office  class,  15  per  cent. 

(4)  On  risks  of  the  Branch  Office  class,  25  per  cent. 

In  order  to  do  business  with  Exchange  members,  a  broker  must  be  placed 
upon  the  Certified  List  of  Brokers  maintained  by  the  Exchange,  which  entitles 
a  broker  to  whom  a  certificate  is  issued  by  the  Brokerage  Committee  to  receive 
a  commission  for  business  placed  with  its  members.  To  obtain  a  certificate  the 
broker  must  be  engaged  exclusively  in  the  insurance  business  or  allied  occupa- 
tions, such  as  real  estate,  and  must  make  the  following  pledges: 

Brokers'  Pledge,  Class  I. — "In  consideration  of  the  commissions  or  broker- 
ages at  the  current  rate  that  may  be  fixed  and  established  for  the  time  being 
by,  and  to  be  paid  by  members  of,  the  New  York  Fire  Insurance  Exchange,  I 
hereby  promise  and  agree  that  I  will  not,  directly  or  indirectly,  pay  to  or  divide 
with  any  person  not  holding  a  broker's  certificate,  any  commission  or  broker- 
age, nor  will  I  receive  from  any  company  or  agent,  directly  or  indirectly,  any 
remuneration  for  business  placed  with  them,  in  excess  of  that  permitted  by  the 
rules  of  the  Exchange." 

Brokers'  Pledge,  Class  II. — "In  consideration  of  the  payment  to  be  made 
to  me  of  an  additional  five  per  cent  to  the  commissions  or  brokerages  as  pro- 
vided for  in  brokers'  pledge.  Class  I,  signed  by  me,  I  hereby  promise  and  agree 
in  addition  to  said  pledge,  that  in  placing  insurance,  I  will  give  the  preference 
to  the  members  of  the  New  York  Fire  Insurance  Exchange,  and  that  I  will  not 
place  any  risk  with  those  not  members  unless  I  cannot  secure  sufficient  insur- 
ance on  such  risks  from  members  of  the  Exchange,  in  which  case  I  agree  to  file 
with  the  Secretary  of  the  Exchange,  within  one  week  of  so  placing,  a  list  of 
such  outside  company  or  companies  in  which  same  has  been  placed,  with  the 
name  of  the  assured,  location  of  risk  and  the  amount  of  insurance  given  them." 

With  reference  to  commissions  it  is  also  provided  that  no  member  may 
purchase  the  business  of  any  broker  on  terms  other  than  the  rate  of  brokerage 
or  commission  fixed  by  the  Exchange. 

Since  practically  all  the  large  and  reliable  companies  belong  to  the  associa- 
tions having  jurisdiction  in  the  territory  in  which  they  operate,  membership  in 
such  associations  is  practically  a  business  necessity.  The  rules  usually  pro- 
vide that  insurance  shall  not  be  placed  with  non-members  unless  the  same  can- 
not be  secured  within  the  ranks.  In  order  to  do  business  with  Exchange 
members  a  broker  must  be  on  the  certified  list  maintained  by  the  Exchange, 
and  the  members  do  not  recognize  a  person  as  a  broker  who  is  not  named  in 
said  list.  No  Exchange  member  may  represent  a  company  outside  the  organiza- 
tion. It  can  be  seen  from  this  that  the  local  associations  have  practically  de- 
cided who  shall  engage  in  the  fire  insurance  business  in  their  territories  exactly 
as  the  New  York  Stock  Exchange  decides  who  shall  do  business  on  its  floor. 
The  Brokerage  Committees  of  some  of  the  various  associations  have  established 
rules  as  they  saw  fit  and  applied  them  as  they  desired.  In  New  York  State, 
however,  the  enactment  of  Section  143  of  the  Insurance  Law  requires  the  Super- 

14 


intendent  to  issue  certificates  to  truthworthy  applicants,  and  since  he  has  been 
^empowered  by  a  recent  law  to  examine  the  practices  of  all  associations  the  lat- 
ter have  of  late  necessarily  regulated  the  conduct  of  their  brokerage  depart- 
anents  so  as  to  be  in  harmony  with  the  policy  of  the  State. § 

The  power  of  the  Exchange  is  exercised  over  brokers  and  agents  in  various 
:minor  ways.  Thus  by  one  association  premiums  for  insurance  are  required  to  be 
paid  within  forty  days  after  the  end  of  the  month  in  which  written,  or  notice 
tf)f  cancellation  of  the  policy  is  to  be  sent  to  the  broker  and  the  insured.  All 
jmembers  of  the  Association  are  also  required  to  adhere  to  the  rates  of  premium 
promulgated. 

(2)  Control  of  Rates  and  Forms.  The  extent  of  local  associations'  control 
iover  forms  and  rates  will  be  best  appreciated  after  a  description  of  the  pro- 
ccedure  of  rating.  Three  departments  are  concerned,  namely,  the  inspection 
idepartment,  the  rating  department,  and,  often,  the  stamping  department. 

The  association  first  comes  in  contact  with  the  risk  through  an  inspector. 
The  insurance  company,  in  accepting  a  risk,  stands  in  the  position  of  a  buyer, 
;and  the  thing  bought  is  the  privilege  of  insuring  the  owner  of  the  building  or 
(Contents,  as  the  case  may  be.  Being  a  buyer,  it  should  have  the  opportunity  of 
examining  the  thing  purchased,  i.  e.,  should  be  allowed  to  see  that  the  privilege 
is  one  which  will  result  in  a  profit,  not  a  loss.  The  inspector,  therefore,  really 
;3tands  in  the  position  of  an  expert  buyer,  representing  one  or  more  companies. 

It  is  his  business  to  note  possibilities  of  fires  beginning,  entering  or  spread- 
ing on  the  premises,  and  all  facts  which  can  be  secured  relative  to  occupancy. 
'The  latter  requirement  necessitates  a  knowledge  of  the  processes  used  in  the 
,business  carried  on  in  the  building.  The  first  step  in  inspection  is  the  acquiring 
(or  making  of  a  map  of  the  premises,  in  which  map  arbitrary  symbols  are  used 
tto  describe  features  of  construction.  The  inspector  must  examine  the  surround- 
:ing  and  nearby  buildings  to  determine  the  risk  from  exposure.  The  type  of 
(building,  whether  frame,  mill,  brick  or  fire-proof  construction,  must  be  consid- 
<ered.  Next  come  wall,  floor,  ceiling,  support  material,  unprotected  metal  or 
light  masonry  liable  to  be  warped  or  fall  from  heat,  openings  in  the  floors, 
:such  as  elevator  shafts  and  stairways,  concealed  and  inaccessible  places,  con- 
tdition  of  the  building,  etc.  He  must  investigate  the  occupancy,  finding  out 
tthe  tenants,  the  parts  of  the  building  occupied,  and  the  occupations  carried  on. 
'The  methods  of  heating  and  lighting  and  many  other  features,  too  numerous  to 
imention,  must  be  considered.* 

The  summary  of  the  investigation  is  contained  in  the  "survey"  which  is 
■handed  over  to  the  rating  department.  This  department  is  sometimes  divided 
iinto  two  sections:  the  "mercantile  department,"  which  rates  mercantile  risks, 
;and  the  "general  hazard"  department,  which  rates  all  other  risks  with  a  few 
texceptions.  The  survey  is  referred  to  the  proper  department  and  a  rate  com- 
puted according  to  the  schedules  and  rules  of  the  Exchange.  A  notice  is  pub- 
lished in  the  daily  bulletin  of  the  association,  if  it  issues  one,  and. the  result 


§Similar  laws  exist  now  in  several  other  States.  See  p.  . 

♦For    description    of    the    inspector's    work    see  E.    R.    Hardy,    "Fire    Insurance," 
IPP.  42-51. 

15 


of  the  rating  is  supplied  to  all  members  in  card  form  for  filing  in  their  rate 
cabinets.  It  is  estimated  that  each  member  who  operates  in  all  of  the  terri- 
tory of  one  of  the  large  urban  exchanges  receives,  annually,  approximately 
50,000  cards.  The  expense  of  the  association  for  this  service  approaches 
$60,000  a  year. 

The  policy  having  been  issued  at  the  rate  promulgated,  a  copy  or  abstract 
thereof  must  be  sent  to  the  "stamping  department."  According  to  the  rules  of 
one  association  abstracts  of  all  policies  and  endorsements  must  be  submitted 
within  seven  days  from  the  time  they  are  written  and  must  contain  the  fol- 
lowing: 

Name  of  company. 

Number  of  policy. 

Location  of  risk. 

Term  of  insurance. 

Kind  of  property. 

Rate  charged. 

Kind  of  co-insurance  clause. 

Rate  of  brokerage. 

Statement  that  all  the  rules  of  the  association  have  been  complied  with. 

If,  after  an  examination,  this  abstract  is  approved,  it  is  stamped  "Cor- 
rect" and  returned.  If  "Incorrect"  any  errors  to  which  attention  is  called  must 
be  corrected  on  the  policy  within  two  weeks. 

Through  the  Committee  on  Rates  the  local  association  fixes  either  specific 
or  minimum  rates  for  the  writing  of  insurance.  A  specific  rate  is  a  rate  on 
an  individual  risk  specified  by  location  and  description,  A  minimum  rate  is  a. 
rate  for  all  risks  of  a  same  general  description,  such  as  dwellings.  In  the 
territory  of  a  large  exchange  there  are  at  least  300,000  buildings,  and  five- 
sixths  of  these  are  given  minimum  rates,  such  rates  being  based  on  the  ex- 
perience of  the  companies  and  the  judgment  of  underwriters.  Specific  rates, 
are  arrived  at  by  the  use  of  schedules. 

The  rules  of  the  association  require  that  no  policies  shall  be  issued  on; 
risks  until  the  latter  have  been  rated  by  the  Exchange.  After  a  rate  has  been 
made  no  insurance  shall  be  written  at  other  than  the  official  rate.  This  rule  is. 
frequently  enforced  by  the  establishment  of  stamping  departments.  Various; 
minor  regulations  are  enforced  regarding  rates,  such  as  that  they  are  binding: 
upon  the  day  they  are  promulgated,  that  when  a  change  in  hazard  takes  place 
the  risk  shall  be  re-surveyed  and  re-rated,  that  rates  made  upon  contents  apply 
only  to  the  occupancy  existing  when  the  building  is  rated  and  the  rate  cardi 
must  be  re-published  for  each  new  tenant,  that  any  error  in  rating  is  to  be  at 
once  corrected  without  reference  to  the  previous  rating.  Even  the  rates  for 
terms  of  insurance  of  less  than  one  year  are  controlled  by  some  associations; 
through  the  prescription  of  "short  rate  tables."  Likewise  "term  rates,"  which 
give  reductions  for  insurance  of  more  than  one  year,  are  regulated. 

f    One-sixth  of  all  buildings,  or  about  50,000  in  a  large  city,  are  rated  by 
means   of  schedules.     Schedules   used  in  the   United   States   are   based   upon 

16 


the  principles  of  either  the  Dean  (Analytic)  or  Universal  Mercantile  Schedules, 
with  variations  to  suit  local  conditions.  The  New  York  Fire  Insurance  Ex- 
change prescribes  and  uses  schedules  based  upon  the  Universal  Mercantile. 
The  four  following  are  the  principal  ones  used: 

(1)  The    Green    Schedule.     One  which  is  used  for  rating  non-fireproof 

hospitals,  clubs,  schools,  stores,  dwellings,  apartments  and  tenements  which  are 
over  the  minimum  height  and  area.  A  four-story  building,  for  example,  con- 
taining a  drygoods  store  on  the  first  floor  and  with  the  three  upper  floors  in 
use  as  dwellings  or  apartments,  would  be  rated  under  this  schedule. 

(2)  The  Merchandise  Schedule,  usually  designated  as  the  General  Schedule. 
This  is  used  for  stores  and  dwellings  which  are  of  such  a  description  that  they 
would  fall  within  the  minimum  rate  class  were  it  not  for  the  fact  that  the  first 
or  grade  floor  contains  an  occupancy  or  business  which  excludes  the  risk  from 
this  class.    Stables  and  garages  are  also  rated  by  this  schedule. 

(3)  Universal  Mercantile  Schedule.  As  its  name  indicates,  this  schedule 
is  adapted  primarily  to  the  rating  of  buildings  used  solely  for  business  pur- 
poses, other  than  heavy  manufacturing.  This  schedule  would  be  applied  to 
retail  and  wholesale  selling  establishments  and  manufacturers  of  dress  goods 
and  clothing.  A  mercantile  building  with  two  or  more  floors  occupied  as  dwell- 
ings would  be  rated,  not  by  this  schedule  but  by  the  Green  Schedule. 

(4)  The  Manufacturing  Schedule.  Such  manufacturing  risks  as  are  not 
rated  under  the  Mercantile  Schedule  would  come  under  this  schedule,  and  there 
would  be  included  some  printing,  wood-working  and  metal-working  establish- 
ments, and  all  serious  manufacturing  hazards.  Certain  other  risks  of  a  dif- 
ferent nature  are  rated  under  this  schedule,  but  it  is  unnecessary  to  enumerate 
them  here. 

In  addition  to  the  above  there  are  used  in  rating  as  many  as  fifteen  special 
schedules  for  special  classes  of  risks,  such  as  hotels,  theatres,  breweries,  etc., 
these  being  known  as  "special  hazards."  For  example,  for  certain  manufactur- 
ing establishments  protected  by  automatic  sprinklers  there  is  a  Restricted 
Sprinkler  Schedule. 

The  schedules  for  rating  are,  of  course,  the  most  important  "forms"  pre- >/ 
scribed  by  local  associations.  In  addition,  however,  they  fix  standard  forms  of 
co-insurance  clauses,  descriptive  clauses,  permissions,  consequential  damage 
clauses  and  many  other  endorsements  or  "riders."  In  this  way  the  danger  is 
avoided  of  having  non-concurrent  insurances  upon  the  same  risk,  which  situa- 
tion may  cause  complications  in  the  settlement  of  a  loss  which  baffle  experts. 

The  above  description  gives  some  idea  of  the  nature,  organization  and 
objects  of  local  associations  of  underwriters.  They  are  voluntary  associations 
of  brokers  and  agents  for  the  principal  purposes  of  maintaining  uniform  rates 
of  commission  and  brokerage  and  establishing  a  scientific,  recognized  system  of 
fire  insurance  rating.  The  economic  functions  of  sectional  as  well  as  local  asso- 
ciations and  the  services  they  both  render  to  the  community  will  be  described 
in  a  later  section. 

17 


NATIONAL  FIRE  UNDERWRITERS'  ASSOCIATIONS. 

THE  National  Board  of  Fire  Underwriters,  membership  in  which  is  open 
to  any  stock  fire  insurance  company  doing  business  in  the  United 
States  by  election  at  a  meeting  or  by  action  of  its  Executive  Com- 
mittee, was  organized  in  1866.  There  are  now  about  160  companies  which  are 
members.  It  was,  until  1878,  a  rate-making  organization;  but  since  that  time 
has  exercised  no  jurisdiction  over  and  is  not  concerned  with  rates,  and  is  con- 
ducted along  lines  best  designated  as  "educational  and  technical,"  having  the 
following  purposes: 

First.  To  promote  harmony,  correct  practices,  and  the  principles  of  sound 
underwriting;  to  devise  and  give  effect  to  measures  for  the  protection  of  the 
common  interests,  and  the  promotion  of  such  laws  and  regulations  as  will  secure 
stability  and  solidity  to  capital  employed  in  the  business  of  fire  insurance,  and 
protect  it  against  oppressive,  unjust,  and  discriminative  legislation. 

Second.  To  repress  incendiarism  and  arson  by  combining  in  suitable  meas- 
ures for  the  apprehension,  conviction,  and  punishment  of  criminals  guilty  of 
that  crime. 

Third.  To  gather  such  statistics  and  establish  such  classification  of  haz- 
ards as  may  be  for  the  interest  of  members. 

Fourth.  To  secure  the  adoption  of  uniform  and  correct  policy  forms  and 
clauses,  and  to  endeavor  to  agree  upon  such  rules  and  regulations  in  reference  to 
the  adjustment  of  losses  as  may  be  desirable  and  in  the  interest  of  all  concerned. 

Fifth.  To  influence  the  introduction  of  improved  and  safe  methods  of 
building  construction,  encourage  the  adoption  of  fire  protective  measures,  secure 
efficient  organization  and  equipment  of  fire  departments  with  adequate  and 
improved  water  systems,  and  establish  rules  designed  to  regulate  all  hazards 
conGcituting  a  menace  to  the  business.  Every  member  shall  be  in  honor  bound 
CO  co-operate  with  every  other  member  to  accomplish  the  desired  objects  and 
purposes  of  the  Board. 

The  expenses  of  the  Board  are  borne  by  assessments  upon  companies  which 
are  members  in  proportion  to  their  net  fire  premiums  in  the  United  Sta':23,  :nJ 
are  apportioned  upon  the  receipts  of  the  preceding  year.  The  officers  are  a 
president,  vice-president,  secretary  and  treasurer,  and  the  activities  of  the  asso- 
ciation, as  of  most  underwriters'  associations,  are  controlled  by  various  com- 
mittees, each  of  which*devotes  its  attention  to  a  particular  field. 

The  Executive  Committee  consists  of  eleven  elected  members,  and  this  is 
the  governing  body.  It  has  power  to  fill  vacancies  occurring  in  its  own  ranks, 
to  elect  honorary  members  and  to  "exercise  all  necessary  powers  to  promote 
the  purposes  of  the  Board."  Its  meetings  are  open  to  all  companies  members 
of  the  Board  but  not  represented  in  the  membership  of  the  Committee.  It 
appoints  a  general  manager  and  such  other  salaried  representatives  and 
clerical  help  as  may  from  time  to  time  appear  necessary. 

Standing  Committees  are  appointed  by  the  president  annually,  of  which 
the  most  important,  for  our  purposes,  are  those  described  hereinafter.  The 
work  of  the  National  Board  may  be  best  indicated  by  considering  the  activities 
of  these  committees. 

The  Finance  Committee.     It  is  the  business  of  this  committee  to  collect 

18 


assessments  from  members  of  the  association  in  proportion  to  the  net  premiums 
received  by  such  companies  on  business  done  in  the  United  States.  The  per- 
centage of  such  assessments  for  the  year  1915  was  1  17  of  1  per  cent.  The 
expenditures  of  the  Finance  Committee  may  be  classified  under  three  heads: 

(1)  General  expenses,  which  include  the  support  of  the  Underwriters' 
Laboratories,  cost  of  inspection,  contributions  to  the  National  Fire  Protection 
Association,  and  the  expense  of  maintaining  the  National  Board; 

(2)  Building  construction  expenses,  including  the  salaries  of  engineers, 
printing  and  equipment; 

(3)  Fire  prevention  expenses,  including  the  salaries  of  the  field  men, 
office  force  and  printing. 

The  Committee  on  Laws.  It  is  the  duty  of  this  Committee  to  obtain 
information  of  the  various  laws  proposed  affecting  fire  insurance  interests;  and 
in  the  past  it  was  the  custom  to  present  at  the  annual  meeting  laws  enacted 
during  the  current  year,  but  arrangements  have  now  been  made  whereby 
information  is  given  to  the  members  from  time  to  time  during  the  year  of  the 
laws  proposed  and  the  work  of  the  Committee  with  a  recapitulation  annually 
of  all  laws  introduced  affecting  directly  the  business. 

Committee  on  Statistics  and  Origin  of  Fires.  The  functions  of  this  Com- 
mittee are  clearly  indicated  by  its  title.  In  1910-1911  it  prepared  a  record  of 
the  fires  and  fire  losses  of  cities  in  this  and  foreign  countries  which  aroused 
widespread  interest  and  was  extensively  quoted  in  addresses  and  in  the  insur- 
ance press.  This  work  has  been  continued  since  that  date.  It  annually  pre- 
pares also  a  tabulation  of  large  conflagrations  as  well  as  other  tables  of  fire 
losses. 

Committee  on  Incendiarism  and  Arson.  This  Committee  has  charge  of  the 
work  of  the  Board  in  the  prevention  of  and  punishment  for  arson.  During  the 
year  ending  April  1,  1915,  ninety  rewards  were  offered,  amounting  to  $28,550. 
As  far  as  possible  this  Committee  co-operates  with  the  committees  of  various 
local  underwriters'  associations.  There  exists,  in  connection  with  this  work,  a 
permanent  arson  fund  which  is  added  to  as  necessary  by  assessments*  upon  the 
companies  which  are  subscribers  to  the  fund.  The  assessments  amount  to  one- 
half  cent  for  each  $100  of  net  premiums,  such  assessments  not  to  exceed  in  one 
year,  however,  one  and  one-half  cents  for  each  $100.  Definite  rules  are  laid 
down  governing  the  payment  of  rewards  for  the  conviction  of  incendiarism; 
but  no  rewards  are  to  be  paid  to  any  officer  or  salaried  employe  of  an  insurance 
company,  or  to  any  public  official,  including  an  officer  of  police. 

Committee  on  Fire  Prevention.  The  work  of  inspecting  cities  for  the  pur- 
pose of  ascertaining  their  facilities  for  protection  against  fire  is  in  the  hands 
of  this  Committee.  This  work  has  been  carried  on  in  its  present  form  since 
1904,  and  during  that  time  reports  have  been  issued  on  about  270  cities,  many 
of  which  have  been  revisited  after  a  lapse  of  five  or  six  years  to  ascertain  the 
extent  of  the  changes  and  improvements.  These  reports  contain  a  description  of 
the  water  works  systems,  fire  department  organization  and  equipment,  fire 
alarm  systems  and  structural  conditions  and  hazards;  conclusions  are  presented 


'Xo  assessment  of  this  character  has  been  levied  since  1905. 

19 


as  to  the  adequacy  and  reliability  of  the  various  fire  protection  features,  as  well 
as  an  opin'on  as  to  the  degree  of  the  conflagration  hazard,  and  recommendations 
are  made  for  improvements  in  the  different  departments.  For  the  past  three 
or  four  years  the  tests  of  fire  engines  exhibited  at  the  Conventions  of  the 
International  Association  of  Fire  Engineers  have  been  conducted  by  the  engi- 
neers of  the  National  Board.  Engineers  have  been  assigned,  on  request,  to 
advise  as  to  the  necessary  fire  protection  facilities  in  some  of  the  government 
buildings  in  Washington  and  for  the  Panama-Pacific  Exposition  in  San  Fran- 
cisco; one  of  the  National  Board  engineers  was  engaged,  while  on  leave  of 
absence,  to  supervise  the  design  and  installation  of  the  fire  protect'on  at  the 
Exposition,  and  another  is  similarly  engaged  on  the  installation  of  a  high- 
pressure  fire  system  in  Boston.  Much  time  is  employed  by  the  engineers  in 
preparing  public  laws  and  ordinances  relating  to  fire  prevention,  many  munici- 
palities calling  upon  the  Board  for  assistance  in  framing  such  ordinances  when 
necessary.  In  various  ways  this  Committee  co-operates  with  local  boards  of 
underwriters,  associations  of  engineers,  associations  of  credit  men,  and  all  who 
are  interested  in  the  reduction  of  fire  losses. 

Committee  on  Lighting,  Heating  and  Engineering  Standards.  The  Na- 
tional Board,  through  this  Committee,  prints  standard  specifications  for  the 
installation  of  protective  devices,  such  as  signaling  systems,  municipal  fire 
alarm  systems,  fire  pumps,  and  similar  appliances.  It  likewise  prints  specifi- 
cations for  the  installing  of  electrical  systems  and  furnishes  such  rules  and 
specifications  as  have  been  named  to  various  associations,  bureaus  and  the 
public,  not  as  orders,  but  as  suggestions  representing  the  best  thought  of 
technical  experts  of  the  insurance  profession.  It  is  by  such  acts  as  these 
that  the  educational  character  of  the  National  Board  is  most  clearly  recog- 
nized, and  it  is  unfortunate  that  the  public  does  not  more  fully  realize  the 
value  of  the  service  which  is  thus  freely  rendered;  but  most  of  the  improve- 
ments in  property  come  rather  by  reason  of  the  insured's  self-interest  in  a 
financial  way  than  through  enlightenment  by  education.  In  other  words,  the 
increased  premium  charge  on  poor  risks  is  a  greater  incentive  to  good  con- 
struction than  a  vast  amount  of  education. 

Committee  on  Construction  of  Buildings.  The  object  of  this  Committee 
is  the  improvement  of  building  construction  in  the  United  States.  One  of  the 
greatest  steps  in  this  direction  was  the  preparation  of  the  National  Building 
Code.  Thousands  of  copies  of  this  work  have  been  distributed,  and  many 
municipalities  in  the  country  have  prepared  or  revised  their  building  ordi- 
nances on  the  basis  of  that  Code.  The  Code  has  recently  been  completely 
revised  so  that  in  effect  it  is  practically  a  new  ordinance.  Its  engineering 
and  fire  protection  features  have  been  brought  into  accord  with  best  present- 
day  practice  and  it  is  now  the  recognized  standard  for  safe  building  con- 
struction. 

The  Committee  maintains  an  expert  service  upon  all  matters  relating  to 
the  drafting  of  building  ordinances  and  fire-resistive  construction.  It  is 
ready  at  all  times  to  aid  municipal  or  State  authorities  with  advice  in  relation 
to  laws  dealing  with  those  subjects.  Such  work  is  constantly  in  progress  and 
■very  beneficial  results  have  been  obtained. 

i^  20 


The  work  is  distinctly  educational  in  character,  and  it  is  evident  that  the 
work  of  this  Committee  is  already  producing  a  material,  beneficial  effect  upon 
the  character  of  building  construction  throughout  the  country,  yet  it  is  recog- 
nized by  the  Board  that  a  full  realization  of  the  protection  to  be  derived  from 
reduction  of  the  conflagration  hazard  will  not  be  attained  for  some  years. 
This  is  because  new  laws  for  the  most  part  regulate  new  buildings,  and  can 
do  little  in  the  way  of  removing  the  hazard  of  existing  structures. 

Ccmmittee  on  Adjustments.  The  endeavors  of  this  Committee  are  in  the 
direction  of  facilitating  the  adjustment  of  losses.  As  an  example  of  its  work, 
one  might  mention  the  preparation  of  an  emergency  equipment  to  be  used 
for  the  benefit  of  all  companies  in  case  of  a  large  conflagration  and  con- 
sisting of  "a  cabinet  with  suitable  cards,  folders,  indices,  etc.,  to  aid  in  at 
once  organizing  a  bureau  to  tabulate  property  destroyed  or  damaged,  to  list 
claims,  companies  interested,  committees  appointed,  dispositions  of  claims, 
and  to  keep  watch  on  fraudulent  or  dual  claims."  This  is  based  upon  the 
experience  gained  in  the  large  conflagrations  of  the  past,  the  idea  being  to 
put  such  experience  in  a  form  available  for  future  guidance,  if  necessary. 

The  Underwriters'  Laboratories.  The  description  of  National  Associa- 
tions must  also  include  some  mention  of  the  Underwriters'  Laboratories,  a 
corporation  formed  by  the  National  Board  of  Fire  Underwriters  in  1902,  the 
entire  capital  stock  having  been  subscribed  for  by  members  of  the  latter  body. 
The  excellent  fireproof  buildings  of  this  concern  in  themselves  are  incentives 
to  better  construction,  combustible  material  having  been  entirely  eliminated 
from  them,  the  very  highest  skill  in  fire  protection  having  been  employed  in 
their  construction,  and  their  internal  fire  defenses  being  the  best  that  modern 
science  can  afford.  The  purpose  of  the  institution  is  best  expressed  in  its  own 
language: 

"The  object  of  Underwriters'  Laboratories  is  to  bring  to  the  user  the  best 
obtainable  opinion  on  the  merits  or  demerits  of  appliances  in  respect  to  the 
fire  hazards.  Such  appliances  include  those  designed  to  aid  in  extinguishing 
fire,  such  as  automatic  sprinklers,  pumps,  hand  fire  appliances,  hose,  hydrants, 
nozzles,  valves,  etc.;  materials  and  devices  designed  to  retard  the  spread  of 
fire,  such  as  structural  methods  and  materials,  fire-doors  and  shutters,  fire- 
windows,  etc.;  and  machines  and  fittings  which  may  be  instrumental  in  caus- 
ing a  fire,  such  as  gas  and  oil  appliances,  electrical  fittings,  chemicals  and  the 
various  machines  and  appurtenances  used  in  lighting  and  heating." 

After  a  device  or  material  has  been  tested  the  report  of  such  test  is  sub- 
mitted to  the  Council  of  Underwriters'  Laboratories,  which  consists  of  twenty- 
two  members,  all  directly  interested  in  fire  protection  work  or  underwriting 
associations  and  representing  all  sections  of  the  United  States  and  Canada. 
If  the  article  is  approved,  it  is  then  listed  as  an  approved  and  satisfactory 
article,  either  direct  by  the  Laboratories*  card  system  to  subscribers  or  through 
the  National  Board's  periodical  list  of  appliances. 

Actuarial  Bureau  Committee.*     What  probably  is  the  most  important  work 


♦For  a  description  of  the  work  thus  far  completed  by  the  Committee  see  Robert 
Riegel,  "Co-operation  and  Classification  in  Fire  Insurance."  Quarterly  Journal  of 
Economics,  August,  1916. 

21 


undertaken  in  recent  years  by  the  National  Board  was  the  inauguration  of 
what  is  known  as  the  "Actuarial  Bureau  of  the  National  Board  of  Fire  Under- 
writers." The  purpose  of  this  work  is  the  compilation  of  statistics  to  the  end 
that  a  complete  and  carefully  compiled  record  of  all  fire  losses  upon  insured 
property  in  the  United  States  may  be  obtained,  with  full  information  regard- 
ing occupancy,  location  and  character  of  property,  values,  insurance,  origin  of 
fire,  etc.,  and  for  the  investigation  of  the  fire  dangers  to  which  each  class  of 
property  is  subject,  and  the  development  of  thorough  and  scientific  informa- 
tion concerning  the  causes  of  fire  and  their  prevention. 

The  plan  for  this  work  was  completed  during  the  year  1914,  and  the 
Bureau  began  active  work  January  1,  1915,  and  has  since  that  date  collected 
and  classified  approximately  500,000  reports  of  losses  which  have  been  paid  by 
the  various  companies  during  the  year  1915. 

The  entire  affairs  of  the  Bureau  are  under  the  charge  of  a  standing  com- 
mit'e?  known  ai  the  Actuarial  Bureau  Committee,  which,  as  other  stand- 
ing committees  of  the  Board,  is  under  the  supervision  of  the  Executive  Com- 
mittee, it  being  understood  that  the  Actuarial  Bureau  Committee  has  full 
power  to  make  such  incidental  changes  as  are  necessary  to  perfect  the  system 
of  classification,  all  changes  subject  to  the  final  approval  of  the  Executive 
Committee. 

The  expenses  of  the  Bureau  are  met  by  an  assessment  by  the  companies 
subscribing  to  its  support  and  are  based  upon  the  gross  premiums  less  only 
cancelation.  This  work  is  open  to  all  fire  insurance  companies  of  every  kind, 
and  includes  in  its  membership  not  only  the  National  Board  companies,  but 
non-Board  companies  and  mutuals. 

It  was  evident  that  this,  the  first  year,  would  be  needed  for  bringing  the 
operation  of  the  loss  department  into  proper  method  and  order,  leaving  little 
or  no  opportunity  for  taking  up  the  question  of  writings,  and  for  that  reason 
the  compilation  of  writings  was  deferred  and  will  not  be  undertaken  until  the 
first  day  of  January,  1916. 

The  National  Fire  Protection  Association.f  About  seventeen  years  ago 
there  was  formed  the  National  Fire  Protection  Association,  the  aims  of  which 
are  stated  to  be: 

(1)  To  promote  the  science  and  improve  the  methods  of  fire  protection 
and  prevention; 

(2)  To  obtain  and  circulate  information  on  these  subjects,  and, 

(3)  To  secure  the  co-operation  of  its  members  in  establishing  proper  safe- 
guards against  loss  of  life  and  property  by  fire. 

The  membership  of  this  body  is  divided  into  three  classes.  National  in- 
stitutions, societies  and  organizations  interested  in  the  protection  of  life  and 
property  against  loss  by  fire.  State  associations  whose  principal  object  is  the 
reduction  of  fire  waste,  and  insurance  boards  and  associations  having  primary 


tNational  Fire  Protection  Association,  "Tlie  Work  of  the  National  Fire  Protecti 
Association." 

22 


jurisdiction  are  eligible  for  active  membership.  Associate  members  are  na- 
tional, State  and  municipal  departments,  chambers  of  commerce,  business 
men's  associations  and  individuals  engaged  in  the  fire  insurance  business^ 
Subscribing  members  are  those  who  receive  the  publications  of  the  association. 
When  a  person  wants  to  know  how  to  make  a  standard  fire-door  or  the  cor- 
rect method  of  installing  a  gasoline  engine  he  goes  to  the  office  of  the  nearest 
underwriters'  association,  where  he  may  obtain  a  pamphlet  containing  the 
information  desired.  At  least  thirty-seven  subjects  are  covered,  these  specifi- 
cations having  been  drawn  by  the  members  of  the  National  Fire  Protection 
Association.  In  acknowledging  its  indebtedness  to  the  experts  who  con- 
tributed, the  Association  states:  "There  is  no  public  effort  in  the  history  of 
the  Nation  to  which  there  has  been  so  freely  given  over  so  long  a  period  so 
much  expert  thought  and  painstaking  technical  investigation  as  to  the  Na- 
tional Fire  Protection  Association."  While  the  connection  of  the  National 
Board  with  the  National  Fire  Protection  Association  is  one  of  membership 
cnly,  they  are  concerned  in  its  activities  inasmuch  as  they  are  principally  those 
of  fire  protection  and  prevention. 

Services  of  National  Associations. 

From  the  foregoing  description  we  may  summarize  the  services  of  national 
associations  of  the  type  considered  as  follows: 

1.  They  educate  the  public  to  an  understanding  of  the  value  of  insurance 
in  the  reduction  of  risk. 

2.  They  bring  about  harmonious  co-operation  of  fire  companies  and  under- 
writers toward  aims  broader  than  mere  indemnity  for  loss. 

3.  They  have  reduced  various  expenses  which  the  insured  ultimately,  of 
course,  pays,  such  as: 

(a)  Expense  of  watching  legislation. 

(b)  Expense  of  protesting  against  unjust  laws. 

(c)  Expense  of  reducing  arson. 

The  effectiveness  of  efforts  along  these  lines  has  been  correspondingly 
increased. 

4.  They  have  compiled  and  published  statistics  of  the  insurance  business 
which  are  recognized  as  standard — the  National  Board  Tables — and  have  made 
instructive  comparisons  of  data. 

5.  They  have  endeavored  to  reduce  arson  and  incendiarism. 

6.  They  have  inspected,  criticized  and  suggested  improvements  in  the 
protective  facilities  of  cities  and  towns. 

7.  They  have  furnished  consulting  engineers  to  assist  in  all  kinds  of  con- 
struction, to  give  advice  on  apparatus  and  ordinances, 

8.  They  have  set  up  standards  for  the  installation  of  lighting  and  heat- 
ing devices. 

9.  They  have  formulated  codes  as  guides  to  correct  building. 

10.  They  have  improved  methods  of  adjusting  losses. 

11.  They   have  been   largely   instrumental   in  causing  the   adoption  of  a 
standard  fire  policy  and  have  formulated  standard  forms  and  clauses. 

23 


12.  They  have  tested  and  inspected  fire  preventive  and  protective  devices 
of  all  kinds  and  have  established  a  standard  of  efficiency  for  such  devices. 

13.  Last,  but  not  least,  they  have  been  the  greatest  factor  in  educating  the 
public  to  the  fact  that  reduction  in  fire  losses  means  reduction  in  insurance 
premiums,  and  that  the  latter  is  principally  dependent  on  the  former. 

It  must  be  admitted  that  the  above  is  only  a  partial  list  of  the  services 
rendered  by  these  organizations,  yet  it  is  hoped  that  it  is  sufficient  to  show 
the  benefits  derived  from  their  existence  by  the  public,  supported  though  they 
are  principally  by  private  capital.  Their  very  existence  is  sufficient  to  show- 
that  insurance  companies  and  underwriters  are  not  concerned  wholly  with  fur- 
nishing indemnity  and  profits  and  losses,  but  perform  other  real  and  useful 
services  to  society.  While  indemnity  for  loss  is  an  indirect  and  negative  service 
of  insurance,  the  above  presents  another  aspect  of  the  business,  showing  results 
which,  while  indirect,  are  yet  positive  in  character. 


SECTIONAL  ASSOCIATIONS  OF  FIRE  UNDERWRITERS. 

A  SECTIONAL  fire  underwriters'  association  is  a  voluntary  organization  of 
company  representatives  having  jurisdiction  over  a  number  of  States, 
as  distinguished  from  local  bodies  which  control  only  single  cities  and 
national  associations  which  are  of  a  technical  and  educational  nature.  The  sec- 
tional association  partakes  of  the  nature  of  both  local  and  national  associations 
in  that  it  performs  work  of  a  technical  nature,  endeavors  to  reduce  fire  waste, 
regulates  commissions  and  influences  fire  insurance  rates.  But  while  control 
of  rates  is  the  primary  function  of  local  bodies  and  technical  work  of  national 
bodies,  the  sectional  associations'  principal  object  now  is  the  reduction  of  the 
expense  of  the  business  by  control  of  commissions. 

The  Eastern  Union. 

The  Eastern  Union  is  an  example  of  the  sectional  type  of  organization,  and 
"is  composed  of  fifty  or  more  of  the  larger  and  stronger  fire  insurance  com- 
panies— both  American  and  foreign — doing  a  fire  insurance  business  in  the 
United  States."*  Any  company  may  apply  or  be  proposed  for  membership,  but 
must  be  elected  by  a  majority  of  the  members  present  at  a  regular  meeting. 
All  members  are,  of  course,  required  to  subscribe  to  the  constitution  and  by- 
laws of  the  association.  It  is  stated  that  in  this  association  no  penalties  or 
fines  exist  to  bind  the  members,  a  sense  of  honor  to  associates  being  the 
only  tie. 

Its  influence,  exerted  through  the  executive  officers  of  constituent  com- 
panies, extends  throughout  the  Atlantic  and  Gulf  Coast  States,  except  where 
prohibited  by  law.f  This  influence  may  be  described  best  by  an  outline  of  the 
functions  of  the  Union.  It  "is  organized  for  the  purpose  of  maintaining,  by 
all  proper  and  legal  methods,  borrect  practices  in  the  business  of  fire  insurance; 


•The  greater  part  of  the  information  secured  on  the  Eastern  Union  was  obtained 
from  a  letter  by  Mr.  Henry  E.  Rees,  former  President  of  the  Union. 
tAnti-compact  or  "anti-trust"  laws. 

24 


the  reduction  of  the  expense  of  the  business  by  controlling,  where  permitted  to 
do  so  by  law,  the  compensation  paid  to  agents  and  brokers,  keeping  always  in 
mind  that  the  expense  of  doing  business  is  necessarily  a  part  of  the  rate  of 
premium  and  must,  in  the  end,  be  borne  by  the  insuring  public." 

Another  object  is  "th^^ystematic  inter-change  of  information  by  which 
all  members  are  benefited,  and^  practical  co^eration  by  inter-insurances,  by 
which  agents  of  Union  members  are  assisted  in  retaining  in  their  offices  large 
line  risks  which  would  otherwise  be  sought  for,  and  probably  written,  by  the 
broker  in  a  distant  city."| 

"The  Union  encourages  superior  fire-resisting  construction,  the  introduc- 
tion of  modern  fire  protection  appliances  in  city  and  individual  plants,  thus 
endeavoring  to  do  its  share  toward  the  reduction  of  the  per  capita  fire  loss 
of  this  country,  which  is  large  when  compared  with  the  older  countries  of 
Europe."§  Thus  it  is  apparent  that  educational  and  technical  services  are  not 
confined  to  national  associations,  although  such  services  are  the  vital  purpose 
of  the  latter.  ^ 

The  Union  also  has  som.e  influence  over  fire  rates,  but  in  many  cases  this 
is  only  indirectly  exerted.  It  may,  for  example,  appeal  to  a  local  association 
to  raise  its  rates;  arid  its  influence  is  usually  sufficient  to  accomplish  the 
desired  object.  No  direct  connection  between  the  Eastern  Union  and  rates 
has  been  discovered. 

It  must  be  recognized  that  the  Union  companies  may  also  have  representa-  / 
tives  in  local  associations.  The  Union  is  an  association^  of  companies,  and  not  f 
of  brokers  and  agents,  and  the  interests  o'f  the  two  may  be  directly  opposed,  \ 
as  in  fact  they  usually  are,  on  the  subject  of  commissions.  It  is  the  practice 
of  many  of  the  non-Union  companies  to  offer  an  increased  commission  to  the 
agent  in  order  to  compete  with  the  Union  companies,  who  have  combined  for 
the  purpose,  as  stated,  of  reducing  expenses.  Competition  of  this  nature  was 
recently  so  intense  as  to  force  the  Eastern  Union  to  the  verge  of  dissolution 
and  compel  that  body  to  raise  their  commissions  to  the  graded  scale  granted 
by  the  Western  Union.  Previously  the  commission  had  been  restricted  to  a 
flat  15  per  cent.  There  are,  however,  in  the  Union  territory,  certain  excepted 
cities,  where  no  limit  is  placed  by  the  associations  upon  commissions,  which 
have  reached  at  times  as  much  as  45  per  cent.  This  high  rate  is  a  tribute  ta 
entrenched  monopoly  which  the  companies  would  like  to  dispense  with.  It 
would  seem  that  some  restriction  should,  if  only  in  the  interest  of  the  policy- 
holder, be  placed  upon  the  rate  of  commission,  which  is  a  large  factor  in  the 
expense  account  and  consequently  in  the  premium. 

The  rules  of  the  local  organizations  regarding  commissions  are  influenced  to 
a  large  extent  by  the  Eastern  Union.  The  Executive  Committee  of  the  Boston 
Board  of  Fire  Underwriters,  for  example,  recently  made  changes  in  the  rules 
after  conference  with  the  Eastern  Union  representatives.  As  Mr.  J.  B.  Kremer 
expresses    it,    "while    the    several    associations    in    charge    of   this    territory"^ 


$See  "Western  Union — Regulation  of  Agents,"  p.  28. 

ILetter   to   the   author  by  Mr.    Henry   E.   Rees,    former  President  of  the  Eastern 
Union. 

25 


<the  South  and  East)  "are  independent  of  it,  its  influence  is  such  that  over 
them  it  has  what  may  be  termed  a  paternal  watchf  ulness."1[ 

The  Western  Union. 

The  report  of  the  National  Board  of  Fire  Underwriters  for  the  year  1879 
contained  the  following  paragraph: 

"One effort this year  has  thus  far  proved  a 

success,  i.  e.,  the  development  of  what  is  known  as  the  Western  Union, 

an   organization    having  for  its   object  the  formation   of  local 

boards  throughout  the  States  governed  by  its  rules.  Their  chief  province 
is  the  equalization  of  rates,  to  be  made  not  excessive,  but  adequate  to 
the  hazards  carried." 

This  association  has,  therefore,  been  in  existence  more  than  thirty  years, 
ibeing  a  result  of  the  National  Board's  relinquishment  of  rating  power.  At 
the  time  of  its  organization,  it  comprised  about  one-half  of  the  general  agency 
ccompanies,  the  number  being  made  up  mostly  of  the  strong  and  conservative, 
;and  this  has  remained  the  character  of  the  membership  until  this  date.  Its 
^authority  extends  over  about  twenty  States  of  the  Middle  West. 

As  the  agency  system  gradually  developed  between  1850  and  1872,  Chicago 
most  naturally  became  the  location  of  the  Middle  Western  general  agencies. 
In_1872  there  had  been  established  in  Detroit  "The  Western  Association  of  In- 
dsurance  Managers,"  but  the  failure  of  this  association  to  suppress  the  demoral- 
Szing  practices  of  hazardous  underwriting  and  reckless  rate-cutting  gave 
•occasion  for  the  formation  in  1879  of  the  "Western  Union."  Membership  then 
was  and  now  is  confined  to  company  officials,  and  its  principal  object  has 
.always  been  to  regulate  commissions,  although  it  has  established  many  local 
iboards  and  has  made  rates.  The  most  important  issue  of  the  Union  soon 
Ibecame  the  demand  for  a  flat  15  per  cent  commission  to  agents. 

The  method  of  government  is  similar  to  that  of  nearly  all  associations,  the 
appointment  of  committees,  among  which  are  the  Governing  Committee,  the 
Technical  Committee,  and  the  Committee  on  Publicity.  The  Governing  Com- 
:mittee  promotes  agreement  between  members,  and  takes  charge  of  the  affairs 
of  the  association  between  meetings.  Recently,  for  example,  an  agreement 
ifor  co-operation  was  made,  and  having  been  found  to  work  satisfactorily,  the 
Governing  Committee  decided  to  extend  its  scope.  It  has  supervision  over 
Tates,  is  the  ruling  body  in  the  association,  and  in  many  cases  acts  as  the 
representative  of  various  constituent  companies  in  adjusting  m.atters  with 
-Insurance  commissioners  and  other  State  officials.  It  maintains  stamping 
departments,  grants  relief  from  published  rates  and  supervises  some  rates.  It 
Bnay  make  agreements  on  behalf  of  the  Union  with  other  organizations. 

The  Technical  Committee  need  not  be  described  here  at  length,  since  its 
■work  is  of  an  educational  and  fire-preventive  character,  and  these  functions 
were  mere  fully  discussed  in  the  section  dealing  with  the  National  Board.    This 


lij.    B.    Kremer,    "The   Agency,"    address    before    the   ninety-first    meeting    of    the 
Insurance  Society  of  New  York. 

26 


committee,  for  example,  will  investigate  the  fire  protection  facilities  of  various 
cities,  and  make  a  report  of  conditions.  Such  a  report  may  be  the  basis  for  a 
recommendation  of  increase  in  the  rates  of  the  backward  communities. 

The  object  of  the  Committee  on  Publicity  is  to  secure  the  co-operation  of 
insurance  commissioners,  fire  marshals  and  commercial  associations  in  educat- 
ing the  public  regarding  the  general  principles  of  fire  insurance,  and  the 
necessity  for  the  reduction  of  the  fire  waste.  Literature  is  sent  out  by  a  pub- 
licity bureau  with  the  intention  of  stimulating  the  interest  of  those  whom 
it  is  desired  to  reach.  While  results  have  been  attained,  the  work  has  not 
received  the  success  it  deserves,  because  the  territory  in  which  the  Union 
operates  is  one  which  is  regarded  as  generally  hostile  to  insurance  associations 
and  their  work. 

The  Territory  of  the  Union. — The  jurisdiction  of  the  Western  Union  ex- 
tends over  the  territory  bounded  on  the  east  by  Pennsylvania,  West  Virginia, 
Virginia  and  North  Carolina,  on  the  south  by  Georgia,  Alabama,  Mississippi, 
Arkansas  and  Texas,  on  the  west  by  Arizona,  Utah,  Idaho  and  Montana,  and 
by  Canada  on  the  north.  At  the  time  of  its  organization,  the  plan  was  rejected 
by  some  powerful  agency  interests  in  a  few  large  cities,  and  these  cities  have 
since  remained  independent,  being  known  as  "excepted  cities." 

The  Functions  of  the  Union. — The  principal  object  of  the  association  is  to 
reduce  the  expenses  of  companies  by  the  restriction  of  commissions  paid  to 
agents.  When  the  association  was  organized  the  principle  contended  for  was  a 
flat  15  per  cent  commission,  and  for  some  years  this  principle  was  maintained. 
But  gradually  non-Union  companies,  by  the  payment  of  higher  commissions, 
secured  the  preferred  business.  The  constant  loss  of  good  risks  finally  com- 
pelled the  Union  to  establish  graded  commissions,  25  per  cent  on  preferred 
risks,  20  per  cent  on  brick  mercantile  buildings,  and  15  per  cent  on  other 
classes.  These  commissions  were  allowed  only  to  agents  representing  Union 
companies,  and  in  mixed  agencies  (representing  both  Union  and  non-Union) 
only  15  per  cent  was  allowed.  In  the  excepted  cities  mentioned  the  commis- 
sions are  open  and  sometimes  run  very  much  higher.  The  necessity  for  some 
organization  or  influence  to  restrict  commissions  is  evident  from  the  fact  that 
the  non-Union  companies  "competed"  with  each  other  until  conditions  were 
unbearable.  They  then  formed  another  association,  known  as  the  Western 
Insurance  Bureau,  with  exactly  the  same  purpose  as  the  one  they  refused  to 
join  or  withdrew  from,  and  established  a  scale  of  graded  commissions  somewhat 
higher  than  the  Western  Union. 

Rates. — The  connection  of  the  Western  Union  with  rates  is  indirect  in 
character.  Where  independent  raters  work,  the  Union  appears  to  act  in  an 
advisory  capacity.  It  tries  to  have  its  members  maintain  the  rates  published,  \ 
and  has  stamping  departments  for  this  purpose  where  legally  permitted.  This  / 
department  advises  the  companies  of  the  proper  rates  and  of  any  changes  in 
the  rates.  Abstracts  of  the  daily  reports  are  sent  to  it,  and  the  correct  rate, 
whether  it  has  been  obtained  or  not,  is  stamped  upon  the  abstract. 

The  rules  provide  that  "no  insurance,  either  direct  or  by  re-insurance,  shall 
be  effected  in  any  manner  whatsoever  at  a  rate  below  the  tariff"  unless  as  else- 
where provided  for  by  the  rules.    If  the  correct  rate  is  violated  the  punishment 

27 


is  loss  of  good  will  among  the  members  and  expulsion  from  the  Union.  This 
penalty  involves,  of  course,  an  entire  readjustment  of  the  offending  person's 
business.  If  it  is  necessary  to  write  the  risks  at  a  rate  lower  than  the  pub- 
lished rate,  a  relief  rule  must  be  passed  by  the  Governing  Committee,  allowing 
a  reduction.  The  Union  prescribes  the  risks  which  may  be  given  term  rates. 
Its  rules  were  several  years  ago  extended  to  brick  mercantile  buildings,  and 
at  a  recent  meeting  the  subject  of  term  rates  was  discussed. 

The  Union  tries  to  form  and  maintain  local  boards  in  the  various  States  it 
covers,  through  traveling  agents  who  get  in  contact  with  local  agents.  This 
work  is  under  the  control  of  the  Governing  Committee,  It  has  an  agreement 
with  the  Western  Insurance  Bureau,  a  rival  organization,  under  which  com- 
panies require  agents  to  settle  for  premiums  received  within  forty-five  days 
from  the  end  of  the  month  in  which  the  risk  is  written.  Agents  try  to  use  the 
non-Union  companies  to  make  the  rule  ineffective.  There  is  also  a  co-operative 
agreement  between  these  two  bodies,  regarding  the  status  of  agencies. 

Inasmuch  as  the  territory  of  this  association  includes  several  States,  the 
rates  which  agents  are  required  to  maintain  are  arrived  at  and  enforced  in 
various  ways,  the  method  varying  with  the  laws  of  different  States.  In  some 
instances,  the  rates  are  made  by  the  local  associations  established  under  the 
influence  of  the  Union.  Other  rates  are  made  by  State  Inspection  Bureaus,  to 
whom  the  work  of  rating  has  been  delegated  by  the  Governing  Committee  of 
the  Union,  which  retains  supervision  over  the  same.  The  inspection  bureaus 
employ  their  own  men  to  perform  the  work.  Whenever  the  State  laws  will  per- 
mit local  boards  are  organized  unless  inspection  bureaus  already  exist.  No 
reductions  in  rates  are  to  be  made  by  members  of  the  Union  until  such  reduction 
has  been  promulgated  by  the  recognized  rating  authority. 

From  the  above  it  will  be  evident  that  the  Western  Union  (1)  acts  in  a 
supervisory  manner  toward  rates,  and  endeavors  to  insure  the  maintenance  of 
the  rates  and  rules  promulgated  by  the  various  recognized  authorities;  and  (2) 
attempts  to  establish  recognized  rating  systems  where  none  exist.  Complaints 
of  violatio:^of  the  established  rates  are  treated  in  the  manner  described  under 
"Regulation^f  Brokers  and  Agents." 

Establishment  of  Inspection  Bureaus  and  Local  Boards. — The  rules  state 
that  "wherever  the  State  laws  will  permit,  the  Union  zvill  reqiiire\\  agents  to 
organize  local  associations,  (except  at  places  which  are  within  the  control  of 
inspection  bureaus  now  existing  or  to  be  hereafter  established)  for  the  pur- 
pose of  establishing  an  equitable  and  discriminating  tariff  of  rates  for  their 
respective  localities,  under  the  supervision  of  State  boards  and  the  governing 
committee  *  *  *  ."  Where  such  local  boards  are  formed,  their  expenses 
must  be  borne  by  members  on  a  pro  rata  basis  of  premium  receipts.  Mem- 
bers of  the  Union  are  forbidden  to  pay  assessments  levied  on  any  other  basis. 

Local  boards  and  inspection  bureaus  may  try  members  for  violations  of 
their  rules  and  punish  as  provided  by  such  rules  for  the  first  or  second  offense, 
but  upon  a  third  conviction,  with  the  approval  and  order  of  the   Governing 


lltalics  are  the  author's. 

28 


Committee,  all  members  of  the  Union  represented  by  such  agent  shall  with- 
draw their  agencies  from  him  and  he  shall  be  thereafter  ineligible  for  any 
agency  appointment  until  reinstated  by  the  Governing  Committee.  An  agent 
not  amenable  to  discipline  is  thereby  "blacklisted."  The  Union  lays  upon  its 
members  the  duty  of  seeing  that  their  agents  obey  the  rules  and  regulations 
of  the  local  bodies  unless  the  same  contravene  those  of  the  Union,  in  which 
case  the  Union  rules  shall  govern.  Any  member  may,  however,  appeal  to  the 
Governing  Committee  from  a  penalty  imposed  on  its  agent  by  a  Ipcal  board 
within  thirty  days  of  the  imposition.  This  Committee  holds  a  hearing  and 
renders  a  final  decision. 

Regulaticn  of  Agents. — It  has  already  been  stated  that  the  rules  require 
the  agents  and  brokers  to  observe  the  published  rates  and  even  the  rates  of 
non-Union  companies  and  provide  penalties  for  failure  to  do  so.  Rebates  of 
commissions  to  the  insured  or  any  person  in  his  interest  are  strictly  pro- 
hibited in  every  form,  and  no  member  is  permitted  to  take  a  line  of  insur- 
ance, or  any  part  thereof,  from  one  who  indulges  in  such  practices,  even 
thovgh  the  portion  offered  such  member  shall  have  been  written  in  accord- 
ance with  the  rules.  Where  a  complaint  of  rebating  is  made  to  the  Governing 
Committee,  the  member  writing  the  line  in  question  must  satisfy  the  Com- 
mittee that  the  insurance  written  involved  no  rebate.  It  is  the  duty  of  the 
Committee  to  investigate  such  complaints  and  rule  in  the  matter.  Appeal 
from  its  decision  to  the  Grievance  Committee  may  be  made  within  ten  days, 
but  the  decision  of  this  latter  Committee  is  final  and  may  be  enforced  by  sus- 
pension or  forfeiture  of  membership. 

The  rules  provide  that  companies  shall  not  reinsure  others  which  are  not 
members  of  the  Union,  in  any  manner  whatsoever,  except  a  non-Union  com- 
pany retiring  from  business  in  Union  territory.  Companies  are  also  required 
to  prevent  their  agents  from  inducing  a  local  agent  to  represent  their  com- 
pany in  place  of  another  Union  member  which  such  local  agent  previously 
represented.  Companies  represented  in  the  Union  must  not  be  represented 
by  the  employes  of  any  non-Union  companies,  except  if  such  non-Union  com- 
panies be  adhering  strictly  to  Union  rules  or  if  local  companies,  to  the  rules 
of  the  local  boards  having  jurisdiction. 

Commissions. — The  Union,  although  originally  desiring  to  enforce  a  15  ' 
per  cent  commission  on  all  classes  of  risks,  has  been  forced  to  recognize  the 
graded  commission  plan,  and  also  the  rival  Western  Insurance  Bureau,  the 
organization  of  which  has  been  described.  Western  Union  companies,  there- 
fore, are  permitted  to  pay  certain  graded  commissions  (i.  e.,  commissions  vary- 
ing with  the  class  of  risk)  as  agreed  upon  in  the  Conference  Agreement  of 
April  6,  1912,  with  the  Western  Insurance  Bureau.  Both  associations  agree 
to  avoid  being  represented  by  agents  who  also  represent  companies  paying 
excessive  commissions,  i.  e.,  non-Union  and  non-Bureau  companies.  Pro- 
visions are  made  for  determining  the  status  of  any  agency  as  either  a  Union, 
Bureau  or  mixed  agency.  In  addition  to  the  work  of  organizing  local  boards 
and  inspection  bureaus,  supervising  rate-making,  and  regulating  agents,  the 
Union  promulgates  rules  governing  the  practice  of  the  business,  which  pre- 
scribe forms  to  be  used,  designate  term  risks,  enumerate  conditions  for  writ- 

29 


ing  sprinklered  risks,  prohibit  the  waiver  of  certain  policy  clauses  and  pre- 
scribe a  short  rate  table. 

The  influence  and  power  of  these  sectional  organizations,  and  the  extent 
to  which  they  foster  concerted  action  by  insurance  companies,  which  is  often 
to  the  public  benefit,  is  well  illustrated  by  what  was  termed  by  the  press  dur- 
ing 1913  as  the  "Missouri  situation."  The  State  of  Missouri,  after  compelling 
insurance  companies  to  file  their  rates  with  the  Insurance  Commissioner  of  the 
State  for  his  approval,  and  ordering  many  risks  to  be  re-rated,  which  the  com- 
panies were  permitted  to  do  through  common  agencies,  passed  an  exceedingly 
drastic  anti-compact  law.  This  law  provided  that  no  combinations  of  insur- 
ance companies  should  be  effected  for  the  purpose  of  making  rates,  and  that 
the  use  by  a  company's  representative  of  any  rate  or  rate-book  "prepared, 
kept  or  furnished"  by  any  person  acting  in  behalf  of  any  other  insurance  com- 
pany was  prima  facie  evidence  of  such  combination.  Heavy  penalties  were 
imposed  for  violation  of  this  provision.  After  fruitless  attempts  by  various 
insurance  interests  to  adjust  matters,  the  Western  Union  held  a  meeting  in 
April,  1913,  at  which  the  question  was  considered.  Although  the  Union  could 
not  act  as  such,  fearing  legal  action  against  it,  the  companies  composing  the 
same  individually  all  agreed  to  cease  writing  insurance  in  the  State  of  Mis- 
souri after  April  30,  claiming  that  business  could  not  be  carried  on  under  the 
new  act's  provisions.  This  caused  tremendous  disturbance  in  all  businesses 
involving  credit,  to  which  insurance  is  necessary,  and  the  State  authorities 
were  finally  compelled  to  agree  that  the  law  would  not  be  enforced.  It  might 
be  added  that  the  Western  Insurance  Bureau  also  pledged  similar  action  by 
its  members. 

Summarizing  the  above  it  may  be  said  that  sectional  organizations  attempt 
to  perform,  in  a  broader  and  looser  manner,  the  functions  undertaken  by  local 
associations.  In  the  first  place  they  exercise  an  influence  over  rates:  (a)  by 
endeavoring  to  insure  the  maintenance  of  those  promulgated  by  various  recog- 
nized authorities  such  as  local  associations,  "independent"  raters  and  inspec- 
tion bureaus;  (b)  by  efforts  to  establish  recognized  rating  systems.  Secondly, 
they  endeavor  to  reduce  the  large  annual  destruction  of  property  by  fire. 
Thirdly,  they  regulate  the  actions  of  insurers  as  regards  rebates,  reinsurance, 
short  and  long  term  rates,  endorsements  on  policies  and  with  respect  to  great 
emergencies  such  as  the  Missouri  situation.  Fourthly,  they  regulate  the  ex- 
penses of  doing  business  as  far  as  commissions  are  concerned. 


ECONOMIC  FUNCTIONS  OF  FIRE  UNDERWRITERS'  ASSOCIATIONS 

NOTWITHSTANDING  considerable  criticism  and  many  statutes  directed 
against  them,*  it  must  be  plain  from  the  description  in  preceding  sec- 
tions that  underwriters'  associations,  far  from  being  inimical  to  the 
public  welfare,  really  possess  econom.ic  functions  and  are  a  necessary  part  of 
the  insurance  system  as  at  present  constituted.     If  the  contentions  of  their 


*See  article  by  the  author,  "Commonwealth  vs.  Co-operation,"  in  THE  MARKET 
WORLD  AND  CHRONICLE,  June  12,  1915. 

30 


critics  be  examined  it  wall  be  found  that  the  faults  of  the  exchanges  are  not 
sins  of  commission,  but,  at  the  very  worst,  sins  of  omission.  Combination  and 
association  have  not  gone  far  enough  and  have  failed  to  completely  attain  their 
purposes.  This  is  not  said  to  "whitewash"  any  associations  which  may  have 
abused  their  power  or  to  compromise  with  any  acts  which  deserve  to  be  con- 
demned. But,  while  it  has  been  a  general  practice  to  bring  to  light  the  delin- 
quencies of  this  system  of  co-operation,  no  real  effort  has  been  made  to  present 
its  desirable  features.  It  is  intended  to  summarize  here  the  more  important 
services  of  such  organizations. 

(1)  Such  organizations  offer  to  insurance  men  a  chance  to  become  ac- 
quainted with  their  competitors,  and  it  will  be  generally  admitted  that  such 
acquaintance  improves  the  moral  tone  of  any  business.  Many  who  would  un- 
hesitatingly take  undue  advantage  of  a  stranger — witness  the  attitude,  for 
instance,  that  it  is  perfectly  proper  to  cheat  a  corporation — regard  it  as  dis- 
honorable to  meet  an  acquaintance  in  any  but  an  open  manner.  In  other 
words,  through  the  medium  of  the  association  a  bitter  struggle  with  enemies 
is  converted  into  friendly  rivalry.  Many  objectionable  practices  are  thus 
indirectly  eliminated. 

(2)  New  problems  arise  in  the  insurance  business  every  day.  Under 
circumstances  where  the  interests  of  agents  and  brokers  do  not  conflict,  where 
they  are  not  enemies  awaiting  every  opportunity  to  out-distance  a  competitor, 
where  they  operate  according  to  a  well-established  code  of  rules,  these  new 
problems  are  more  likely  to  be  discussed  in 'a  fair  and  open  way,  and  the 
combination  of  two  or  more  minds  will  more  probable  arrive  at  a  correct  and 
equitable  solution  of  any  difficulty  than  will  individuals  thinking  independ- 
ently. For  individual  opinion  there  is  substituted  mutual  counsel  and  con- 
certed action  by  means  of  associations.  For  example,  how  could  a  rating 
schedule  be  adapted  to  local  conditions  except  by  the  concerted  action  of 
experts?  How  could  an  adequate  and  just  scale  of  commissions  be  otherwise 
adopted?  Hov/  could  it  be  decided  whether  or  not  certain  acts  were  detri- 
mental to  the  business  as  a  whole? 

(3)  From  time  to  time  legislation  is  enacted  which  is  prejudicial  alike 
to  the  insurers  and  the  public.  As  an  instance  may  be  cited  valued  policy  laws 
which  sometimes  compel  insurance  companies  to  pay  the  insured  more  for  his; 
property  than  its  value  at  the  time  of  the  fire  and  thus  encourage  destruction: 
of  property.  Also  may  be  mentioned  retaliatory  laws,  whereby  one  State  taxes- 
heavily  the  insurance  companies  of  another.  The  second  retaliates,  and  so  ont 
— the  insurance  companies  and  ultimately  the  insured  paying  the  cost  of  this 
war  of  statutes.  Against  such  legislation  protection  is  required;  and  it  can- 
not be  obtained  by  individual  action.  Singly,  insurance  companies,  because 
of  popular  ignorance  of  the  business,  are  at  the  mercy  of  any  laws  which. 
may  be  enacted,  without  hope  of  public  support.  A  protective  alliance  is  the 
only  defense  available.  When,  as  in  Missouri,  the  law  one  year  permits  com- 
panies in  common  to  employ  an  expert  to  make  rates  and  the  next  year  makes 
a  combination  of  this  kind  a  penitentiary  offense,  single  companies  alone  are- 
powerless,  but  concerted  group  action  may  force  a  more  just  exercise  of  State 
power. 

31 


(4)  Judicial  procedure  in  the  United  States  is  notoriously  slow.  In  many 
businesses  associations  exist  to  prevent  dealers  who  refuse  to  abide  by  business 
ethics  from  transacting  business  with  honest  men.  Thus  the  New  York 
Stock  Exchange  has  the  power  to  exclude  from  its  floor  any  broker  whose 
acts  aro  ii.c-ns.Sccnt  wim  business  principles  without  waiting  for  a  court 
decision  which  may  not  be  delivered  for  several  years.  In  the  same  way  the 
underwriters'  associations  afford  a  means  of  ridding  the  business  of  objection- 
able persons.  About  a  year  ago,  for  example,  a  certain  political  "boss"  was 
lefised  admission  to  one  association  because  of  his  general  reputation.  That 
an  association's  power  in  this  respect  is  capable  of  abuse  cannot  be  denied, 
but  ic3  proper  exercise  is  apparantly  serviceable  to  the  community. 

(5)  It  is  probable  that  nothing  has  had  so  much  influence  upon  the  de- 
velopment of  a  scientific  method  of  rating  as  associations  of  underwriters. 
Pr.or  to  the  adoption  of  the  Universal  Mercantile  Schedule  no  very  generally 
accepted  system  of  rating  existed.  After  the  issuance  of  this  schedule,  which 
itself  was  but  an  evolution  of  more  or  less  crude  schedules  promulgated  by  the 
older  local  associations,  the  schedule  principle  was  further  improved  by  such 
associations  and  adapted  to  the  requirements  of  practically  all  localities.  Mr. 
C  A.  Hexamer  said  in  this  connection,  in  an  able  article:  "I  will,  therefore,  con- 
fine myself  to  the  history  of  the  development  of  *  *  *  the  Pniladelphia  Fire 
Underwriters'  Association,  believing  that  in  the  development  of  that  organiza- 
tion all  of  the  various  advancements  in  scientific  rate-making  can  be  clearly 
traced. "$  This  association  began  in  1852.  It  promulgated  later  "Classes  of 
Hazards  and  Rates  of  Premium  in  the  City  of  Philadelphia,"  which  list  was 
based  upon  principles  still  in  use  and  was  the  beginning  of  the  present  system. 
The  Underwriters'  Association  of  New  York  State  was  formed  in  1883  and  the 
Irrational  Board  of  Fire  Underwriters  in  1866.  Practically  all  of  the  larger 
associations  in  the  East  have  been  in  existence  prior  to  the  adoption  of  the 
schedules  in  use  to-day,  and  it  is  natural  to  expect  that  schedules  requiring 
combined  opinions  of  underwriters  should  develop  from  organizations  foster- 
ing acquaintance,  mutual  counsel  and  co-operation. 

(6)  Of  the  advantages  of  combined  action  in  rating  and  inspection  much 
might  be  said,  but  a  brief  illustration  must  suffice.  Let  us  suppose  that  in 
a  given  territory  there  are  40,000  insurable  mercantile  and  manufacturing 
risks.  Inspection^  entailing  expense  are  necessary.  There  are,  we  will  say, 
fifty  insurance  companies  in  the  field  and  each  risk,  on  the  average,  is  in- 
sured in  two  companies.  It  is  frequently  the  case  that  large  risks  are  divided 
between  four  or  five  companies.  There  are,  therefore,  80,000  insurances  and, 
if  no  co-operation  exists,  80,000  inspections  and  ratings.  Arbitrarily  assuming 
the  cost  of  each  to  be  $5,  the  expenditure  is  $400,000,  an  expense  which  must, 
of  course,  ultimately  be  borne  by  the  policyholder.  If  the  companies  combine 
to  do  this  work  the  40,000  buildings  are  rated  once  at  a  cost  of  $200,000  and 
the  results  are  available  to  all  at  one-half  the  alternative  cost.  Every  member 
of  the  association  or  rating  bureau  receives  his  card  covering  each  risk.     It 


f'Rates   and   Schedule  Rating,"   Annals   of  American  Academy  of  Pol.    and   Soc. 
Science;  title,   "Insurance,"  September,  1905. 

32 


is  apparent  that  the  extent  of  the  saving  is  dependent  upon  the  number  of  in- 
surances upon  the  same  building  and  number  of  times  inspections  and  re- 
inspections  are  required. 

(7)  The  above  figuring  does  not  adequately  measure  the  savings,  since 
no  account  has  been  taken  of  that  reduction  of  expense  which  naturally  follows 
combination,  due  to  specialization  and  division  of  labor. 

(8)  When  a  number  of  companies  pool  their  facilities  to  obtain  a  rate  ]' 
it  must  be  admitted  that  the  result  is  more  probably  just  and  adequate  than  j 
where  the  charge  is  the  result  of  or  is  influenced  by  competition;  and  adequate  ! 
rates  which  are  not  exorbitant  are  to  the  interest  of  both  the  public  and  the  \ 
insurer.     It  is  impossible  for  ruinous  competition  in  the  insurance  business 
to  prove  of  any  lasting  advantage  to  the  policyholder.     In  most  other  busi- 
nesses, the  result  of  competition  among  producers  or  distributors  is  an  ad-    i^ 
vantage,  more  or  less  permanent,  to  the  consumer.     In  purchasing  insurance,  \ 
however,  it  is  impossible  for  him  to  receive  the  same  article  at  the  reduced   j 
price.    The  commodity  he  purchases  is  not  delivered  to  him  at  once,  but  over  a  / 
term  of  one  year,  three  years  or  five  years.     If  the  price  is  reduced  by  25  j 
per  cent  the  stability  of  the  selling  company  is  reduced,  and  this  stability  is 
the  only  guarantee  that  the  consumer  will  receive  the  protection  he  paid  for. 
The   company,   in  other  words,  after  the  advance  payment  of  the  premium 
stands  in  the  position  of  debtor  to  the  insured,  and  it  is  to  the  advantage  of 
the  latter  to  have  it  in  as   good  financial  condition  as  possible.     Adequate 
rates    are,   therefore,   to   the   common   interest,   and   in   bringing   them    about 
the  associations  render  a  service  to  all. 

(9)  While  authorities  are  divided  on  the  question  of  the  necessity  of 
classification  of  loss  statistics  in  the  fixing  of  rates,  if  such  statistics  are  of 
value  the  underwriters*  association  presents  itself  as  a  medium  (and,  indeed, 
the  only  practical  one)  for  obtaining  such  data.  In  fact,  in  the  opinion  of 
one  investigator  of  the  subject,§  "effective  measures  should  be  adopted  in 
order  to  enable  the  exchange  to  obtain  the  experience  of  companies  on  the 
various  classes  rated  by  it."  Recently  the  idea  of  using  classified  loss  data 
as  a  basis  for  rates  seems  to  have  the  ascendancy  and  the  National  Board 
has  a  committee  working  on  this  problem  at  the  present  time. 

(10)  It  is  and  has  been  for  some  time  the  practice  of  insurance  companies 
to  consider  one  year  as  the  standard  policy  term  and  to  charge  proportion- 
ately for  insurance  of  less  than  one  year.  Rates  for  terms  shorter  than  one 
year  are  known  as  "short  rates."  Originally  companies  charged  what  they 
liked  for  short  term  insurances.  Later,  a  little  uniformity  was  attained 
but  was  sacrificed  when  such  a  course  seemed  desirable.  Now,  however,  all 
the  companies  of  the  Middle  West  adhere  to  the  short  rate  table  of  the  West- 
ern Union  and  many  local  organizations  have  established  tables  which  coin- 
cide. Likewise,  it  has  been  the  practice  very  generally  to  make  some  reduc- 
tion proportionately  in  the  premium  for  insurance  taken  for  short  terms  of 
three  and  five  years.     These  reduced  rates  apply  only  to  certain  classes  of 


§S.    Deutschberger,    "Report   on   Examination   of   New   York   Fire   Insurance   Ex- 
change." .July  21,  1913.     New  York  Insurance  Department. 

33 


risks  and  are  called  "term  rates."  No  uniformity  exists  whatever  regarding 
the  classes  of  property  which  may  receive  term  rates  except  such  as  is  im- 
posed by  the  underwriters'  associations.  Thus  it  is  evident  that  such  associa- 
tions have  promoted  uniformity  as  regards  short  and  long  term  rates. 

(11)  A  fire  insurance  premium  is  in  the  nature  of  a  tax  and  all  taxes  are 
based  upon  uniform  assessments  of  the  same  percentage  of  value.  Like- 
wise, insurance  rates  are  based  upon  the  supposition  that  all  will  insure  at 
least  a  certain  percentage  of  the  value  of  their  property.  The  majority  of 
losses  by  fire  are  small.  Therefore,  other  things  being  equal,  the  property 
owner  who  insures  a  proper  percentage  of  his  property's  value  is  entitled  to  a 
lower  rate  than  one  who  insures  a  small  percentage.  There  is  a  difference 
between  the  cost  of  insuring  different  percentages  of  value  even  greater  than 
the  difference  between  wholesale  and  retail  prices  in  mercantile  business. 
Co-operation  of  companies  is  necessary  to  provide  for  this  by  percentage  co- 
insurance clauses  in  all  policies,  or  general  adjustments  of  the  rate. 

(12)  It  is  probably  necessary  only  to  mention  the  work  of  the  associa- 
tion in  raising  the  standards  of  building  construction  and  rendering  lives, 
houses  and  factories  less  liable  to  destruction.  The  work  of  the  national 
organizations  along  this  line  has  been  described.  The  efforts  of  State,  sec- 
tional and  local  bodies  must  not  be  forgotten.  The  importance  of  these  efforts 
to  reduce  fire  waste  is  apparent  when  we  consider  that  the  loss  per  capita  by 
fire  in  the  United  States  is  ten  times  that  in  many  European  countries.  Mr. 
Willis  0.  Robb,  manager  of  the  New  York  Fire  Insurance  Exchange,  says: 
"The  Exchange  has  done  almost  more  than  any  other  agency  both  to  improve 
the  quality  of  so-called  fire-proof  construction,  by  charging  for  defects,  and 
to  encourage  by  its  very  low  fire-proof  building  rates,  the  multiplication  of 
standard  fire-proof  structures  and  the  breaking  up  of  great  areas  of  conflagra- 
tion breeders.  The  difference  between  properly  and  improperly  protected 
columns  and  beams  is  one  that  architects  and  owners  have  largely  learned 
from  underwriters,  whose  knowledge  has  been  put  before  them  in  the  per- 
suasive form  of  discriminating  rates.  It  is  now  a  common  practice  for  archi- 
tects to  submit  plans  for  new  buildings  and  improvements  to  the  Exchange 
for  comment  and  criticism,  and  in  order  to  secure  advance  information  as  to 
the  probable  rates. "^  The  inspections  of  the  Association  of  the  Middle  De- 
partment, for  example,  of  smaller  towns  and  cities,  have  resulted  in  many 
improvements.  Engineers  are  supplied  who  give  gratuitous  service,  and 
other  activities  along  this  line  have  been  described  elsewhere. 

(13)  Along  with  the  efforts  to  better  building  construction  go  the  serv- 
ices rendered  in  standardizing  and  improving  protective  and  preventive  devices. 
This  work  has  been  described  in  the  consideration  of  the  functions  of  the 
National  Board  and  the  National  Fire  Protection  Association,  and  is  only 
mentioned  here  to  make  the  list  of  services  as  complete  as  possible. 

The  report  on  the  Examination  of  the  New  York  Fire  Insurance  Exchange 


1IW.  O.  Robb:  "New  York  Fire  Insurance  Exchange,"  Popular  Insurance  Magazine 
February,  1911. 

34 


states: II  "There  can  be  no  doubt  that  the  practice  maintained  from  the  first  by 
the  Exchange  of  including  in  its  rates  a  charge  for  defective  water  supply 
and  fire  protection  and  making  prompt  allowance  for  betterments  in  these 
respects,  has  contributed  largely  to  the  improvement  in  fire  protection,  both 
public  and  private,  that  has  been  so  marked  a  feature  of  the  recent  history 
of  New  York." 

(14)  In  addition  to  the  co-insurance  clause  previously  mentioned,  the 
value  of  the  standardization  of  other  forms  of  clauses  and  endorsements  should 
be  noted.  If  the  value  of  a  standard  fire  policy  be  acknowledged,  it  follows 
that  similar,  though  lesser,  benefits  must  result  from  uniform  clauses.  The 
legal  meaning  of  various  words  and  phrases  becomes  fixed,  the  underwriter 
knows  definitely  what  privilege  he  is  giving  and  the  policyholder  what  benefit 
he  is  receiving. 

(15)  Underwriters'  associations  are  a  great  influence  toward  economy. 
We  have  already  mentioned  the  saving  in  expense  of  rating  by  means  of  co- 
operation, and  there  is  also  a  saving  in  other  items.  In  an  era  of  competition, 
an  increase  in  commissions  to  agents  and  brokers  is  almost  as  effective  as  a 
decrease  in  rates.  By  means  of  the  regulations  of  associations  excessive  com- 
missions are  eliminated.  The  rules  of  the  associations  also  provide  against 
the  evils  of  the  rebate,  which  entails  a  preference  of  one  policyholder  over 
another.  In  other  words,  fire  insurance  companies,  through  associations,  have 
themselves  abolished  an  evil  which  in  the  railroad  business  required  the  inter- 
vention of  the  Federal  Government. 

A  synopsis  of  these  economic  functions  will  serve  to  place  them  more 
clearly  in  mind.    The  services  of  underwriters'  associations  may  be  grouped  as: 

I.     Those  regarding  economy: 

(A)  In  the  making  of  rates: 

(a)  by  the  saving  in  labor  and  expense; 

(b)  by  specialization  and  division  of  labor. 

(B)  In  commissions. 

(C)  In  surveillance  over  legislation. 
II.     Those  regarding  standardisation: 

(A)  Of  rates  and  rating  systems: 

(a)  by  the  improvement  of  schedules; 

(b)  by    the     establishment    of    organizations    to    apply    the 

schedules; 

(c)  by  the  elimination  of  rate-cutting; 

(d)  by  the  classification  of  loss  statistics. 

(B)  Of   long-term   rates. 

(C)  Of  short-term  rates. 

(D)  Of  clauses   and  endorsements. 
III.     General  results: 

(A)  Elimination  of  objectionable  practices: 
(a)  by  acquaintance; 


|Pp.  123-124,  New  York  Insurance  Department,  July  21,  1913. 

35 


(b)  by  prohibition  of  rebates; 

(c)  by  expulsion  of  undesirable  members. 

(B)  Mutual  counsel  and  assistance. 

(C)  Surveillance  over  legislation. 

(D)  Prevention  of  and  protection  against  fire. 

Like  many  supposed  evil  combinations  such  associations  prove  upon  exam- 
ination to  be  really  of  assistance  to  the  insurance  consumer,  if  that  term 
can  be  applied  to  the  holder  of  a  fire  policy.  Their  services  in  connection 
with  economy  and  standardization  entitled  them  to  be  recognized  generally 
as  institutions  with  certain  very  proper  functions,  with  individual  instances 
of  bad  practices  and  abuse  of  power.  In  this  light  the  proper  object  of  any 
legislation  is  very  plain,  namely,  to  retain  the  advantages  of  such  associations 
and  to  eliminate  any  undesirable  features.  This  is  to  regulate.  Regardless 
of  the  seemingly  plain  necessity  of  such  a  course,  however,  for  many  years 
our  legislatures  have  pursued  the  course  of  hostility  toward  co-operation,  of 
prohibition  of  combination.  The  companies  have  been  proceeded  against 
under  general  anti-trust  laws  applicable  to  all  industries,  under  the  common 
/aw,  under  specific  anti-trust  statutes  naming  insurance  and  other  businesses 
in  particular  and  under  State-rating  acts.  With  the  exception  of  instances 
where  the  mere  filing  of  rates  is  required,  only  two  or  three  of  our  States  have 
recognized  the  principle  of  regulation.  In  a  few  other  States  the  advantages 
of  co-operation  are  admitted  but  quite  unconsciously  and  only  under  State 
administration  of  the  rating  facilities.  Yet  after  so  many  years  and  so  gen- 
eral a  trial  no  success  can  be  claimed  for  the  prohibitory  variety  of  legislation. 


CAUSES  OF  LEGISLATION  AGAINST  FIRE  UNDERWRITERS' 
ASSOCIATIONS 

A  STUDY  of  fire  underwriters*  associations  makes  two  facts  very  appar- 
ent— (1)  that  they  have  certain  very  definite  economic  functions  and 
a  place  in  the  present  insurance  system,  and  (2)  that  notwithstanding 
this,  the  public  has  become  opposed  to  them  and  legislation  has  endeavored  to 
suppress  them.  The  services  of  these  associations  have  been  enumerated  in  a 
previous  section,^''  and  the  extent  of  the  antipathy  to  this  form  of  organiza- 
tion may  be  judged  by  the  number  of  investigations,  prohibitory  statutes  and 
prosecutions.  Fire  insurance  investigations  have  been  conducted  by  at  least 
nine  States,  during  the  past  three  or  four  years — New  York,  Illinois,  Wisconsin, 
Texas,  Illinois,  Kansas,  Missouri,  Louisiana  and  Pennsylvania.  In  1912  an 
investigation  by  the  Bureau  of  Corporations  involving  an  estimated  expendi- 
ture of  from  $30,000  to  $300,000  was  proposed.  The  Insurance  Commissioner 
of  Illinois  in  May,  1914,  employed  a  special  investigator  to  determine  the  rea- 
sonableness of  rates  in  that  State.  The  States  of  Missouri  and  Kentucky 
were  for  a  time  partially  deprived  of  insurance,  as  a  result  of  laws  aimed  at 
underwriters'  associations.  In  view  of  the  benefits  claimed  for  such  organiza- 
tions it  is  surprising  to  find  twenty-seven   States  having  general  anti-trust 


<i>  See  p.  29. 

36 


laws  which  may  possibly  be  construed  (but  are  not  usually)  as  applying  taj 
underwriters'  associations,  seven  States  having  laws  which  specifically  prohibit 
combinations  to  fix  insurance  rates,  three  statutes  which  provide  for  the  re- 
vision of  rates  by  the  State  and  three  which  permit  State  boards  to  fix  rates. 
Why  does  such  hostility  exist  toward  such  apparently  useful  and  economical 
bodies  ?  Why,  when  railroad  tariff  associations,  for  instance,  have  been  legally 
recognized,  have  legislators  so  persistently  attempted  to  abolish  combinations 
for  the  purpose  of  making  fire  insurance  rates? 

A  prominent  insurance  man  has  said:  "The  two  great  questions  con- 
fronting the  stock  insurance  companies  at  the  present  time  are  (a)  a  revolu- 
tionizing and  standardizing  of  its  rate-making  methods  to  place  the  same 
upon  a  consistent  basis,  and  (b)  a  revision  of  its  cost.''^^*  This  is  a  mild 
statement  of  the  views  which  have  actuated  the  sincere  but  mistaken  repre- 
sentatives of  the  people  in  their  attacks  upon  underwriters*  associations, 
stamping  departments  and  "independent"  raters.  The  work  of  such  organi- 
zations as  have  confined  themselves  to  forwarding  the  cause  of  fire  protection 
and  prevention  has  not  been  interfered  with;  in  insurance  "all  roads  lead  to 
the  rate  question"  and  attention  has  been  centered  upon  the  rate-fixing  and 
commission-regulating  organizations.  What  are  the  contentions  of  those  who 
oppose  these  organizations  and  which  methods  give  rise  to  criticism  ?  In  order 
to  properly  understand  the  present  attitude  toward  the  associations  we  must 
consider  the  circumstances  which  gave  rise  to  this  attitude. 

At  the  outset  of  this  discussion  it  is  necessary  to  eliminate  one  repeatedly 
disproven  criticism,  namely,  that  fire  insurance  companies  on  the  whole  have 
earned  exorbitant  profits,  i.  e.,  that  the  general  level  of  rates  is  too  high. 
This  contention  is  based  upon  a  comparison  of  profits  with  fire  insurance 
companies'  capital  alone.  Stock  companies  carry,  however,  a  large  surplus 
against  possible  conflagrations.  This  sum,  which  belongs  to  the  stockholders, 
might  be  withdrawn  and  otherwise  invested;  if  left  with  the  insurance  com- 
pany it  is  entitled  to  some  return.  When  the  earnings  are.  compared  with  the 
capital,  surplus  and  a  portion  of  the  reserve  (say  30  per  cent)  no  basis  exists 
for  the  complaint  of  exorbitant  returns.  In  fact,  considering  the  number  of 
companies  forced  to  retire  from  business,  fire  insurance  seems  a  rather  haz- 
ardous investment.  The  elimination  of  this  possibility  of  generally  excessive 
rates  leaves  only  to  be  considered  the  important  question  of  discrimination. 
There  will  be  recognized  discrimination  between  (a)  classes  of  risks,  (b) 
kinds  of  policies,  (c)  localities,  and  (d)  particular  risks.  The  regulation  of 
brokers  and  agents  also  requires  discussion.  These  varieties  of  discrimination 
will  be  considered  in  the  order  given. 

Discrimination   Between  Classes  of   Risks. 

Among  the  risks  of  insurance  companies  are  included  buildings  and  con- 
tents of  many  classes,  such  as  hotels,  dwellings,  public  halls  and  factories  of 
all  kinds,  the  rate,  of  course,  varying  not  only  according  to  the  class,  but  with 
the  character  of  the  particular  building  and  contents.     All  risks  except  those 


"Some    Methods    of    the    Fire    Insurance    Business,"    New    York    Journal    of    Com- 
merce,  i'arch  26,  1914. 

37- 


taking  minimum  rates  are  rated  by  schedules,  which  proceed  from  a  certain 
basis  rate  and  give  due  additions  or  deductions  for  important  components  of 
hazard.  These  additions  and  deductions  are.  often  percentages  of  the  basis 
rate.  The  basis  rate  of  the  class  is,  therefore,  a  very  important  factor  in  the 
final  rate  upon  any  particular  building  in  that  class.  If  it  is  fixed  higher 
than  it  should  be,  every  building  within  the  class  suffers  an  injustice,  and  the 
final  rate  on  each  is  higher  than  it  should  be.  A  basis  rate  too  low  has  an 
opposite  effect,  and  confers  upon  the  class  which  obtains  it  an  undeserved 
benefit  at  the  expense  of  other  classes.  Under  such  a  state  of  affairs  the 
owners  of  some  buildings  are  excessively  taxed  in  order  to  eke  out  the  in- 
adequate premiums  of  those  favored  with  an  unjustly  low  rate.  How  is  the 
proper  basis  rate  for  a  particular  class  to  be  determined?  In  general  the 
premiums  on  the  various  classes  of  risks  should  be  proportionate  to  the  losses 
on  these  classes.  If  for  every  $1,000,000  of  insurance  written  on  hotels,  losses 
to  the  extent  of  $25,000  annually  occur,  and  for  every  $1,000,000  of  insurance 
written  on  apartments  $20,000  is  paid  in  losses  annually,  (assuming  these 
figures  for  the  sake  of  illustration),  the  rate  on  apartments  should  be  four- 
fifths  of  the  rate  on  hotels.  Any  rate  above  this  is  an  overcharge  of  the 
apartment  owners.  It  would  seem  that  such  a  principle  would  be  instantly 
recognized  and  applied  by  the  insurance  companies;  but  it  has  been  claimed 
that  such  is  not  the  case. 

A  report  of  the  Superintendent  of  Insurance  of  Missouri  contained  an 
abstract  of  the  testimony  of  Mr.  F.  J.  Fetter,  who  promulgated  fire  rates  for 
all  parts  of  Missouri  except  St.  Louis  County,  and  Mr.  Fetter  is  reported  as 
follows  :^'^  "I  had  no  figures  or  experiences  from  any  of  the  companies  show- 
ing their  losses  or  profits  on  the  various  classifications  to  aid  me  in  making 
up  the  rates.  During  the  time  that  I  rated  the  State  I  collected  no  actual 
data  or  experience  of  the  companies  showing  their  losses  or  profits.  It  may 
be,  however,  that  under  this  system  a  man  who  owns  a  building  of  one  kind, 
like  a  fireproof  building  or  a  sprinklered  building,  would  be  paying  more 
than  was  sufficient  to  carry  his  risk;  while  another  man  owning  a  building 
specially  liable  to  be  burned  would  be  paying  less  than  he  ought  to  pay,  but 
it  has  been  the  practice  to  lump  together  the  experiences  from  all  the  dif- 
ferent schedules  and  base  rates  on  these  aggregate  results.  The  rates  that  I 
made  were  called  estimates.  We  had  better  call  them  estimates  until  they  are 
approved,  and  then  they  become  rates.  They  were  what  I  considered  fair,  but 
might  be  termed  guesses."  Mr.  H.  M.  Hess,  chairman  of  the  Missouri  Actuarial 
Bureau,  testified  as  follows  :^*^  "I  have  never  seen  any  statistics  covering  fire- 
proof buildings.  I  have  no  statistics  to  justify  any  of  the  basis  schedules 
other  than  what  I  have  quoted  as  to  the  average  experiences  of  the  State  of 
Missouri,  and  they  cover  only  the  aggregate  results.  Many  of  the  schedules 
may  be  too  high,  and  others  too  low,  but  in  the  aggregate  they  produce  fair 
and  reasonable  profits."  Mr.  J.  V.  Parker,  whose  business  is  the  study  of 
fire  hazard  and  the  formulation  of  schedules  and  rates,  said:     "No  tabulated 


<3)  Report  for  1912,  pp.  9-10. 
<♦'  Report  for  1912,  p.  11. 


38 


or  classified  statistics  are  filed  in  my  office.  The  general  loss  ratio  of  all 
companies  on  all  classes  of  business  in  each  State  and  over  all  States,  as 
shown  by  'Insurance  by  States'  and  the  National  Board  of  Fire  Underwriters' 
printed  proceedings,  are  the  available  statistics  showing  the  relation  of 
premiums  to  losses  on  all  classes  of  business."  Mr.  Parker  was  asked  the 
following  questions:  "Did  you  ever  see  any  statistics  on  sprinklered  busi- 
ness? Ever  see  any  on  fireproof  buildings?"  and  his  answer  was,  "I  have 
not."  The  fire  insurance  companies  doing  business  in  the  State  of  Missouri 
were  written  to  and  their  answers  confirmed  the  facts  set  forth,  almost  all 
stating  that  no  such  statistics  were  kept.*^*  If  the  lumping  together  of  loss 
statistics  was  followed  to  its  logical  conclusion  premium  calculations  would 
also  be  lumped  together  and  all  classes  of  risks  would  start  with  a  common 
basis  rate,  say  $1  per  $100.  As  a  matter  of  fact,  the  path  of  progress  leads 
in  another  direction, — toward  differentiation. 

The  question  immediately  arises,  why  is  one  risk  rated  twenty  times  as 
much  as  another?  Why  is  the  basis  rate  on  grain  elevators  $1.50  and  on 
iron  foundries  $1,  machine  shop  schedule  $1.25,  tin  can  factory  $1.59,  flour  mill 
schedule  $1.75?  Equal  basis  rates  are  not  demanded,  for  that  would  be  even 
more  unjust  than  present  arrangements;  but  the  theory  is  that  a  fire  rate 
equitably  measures  the  fire  hazard,  and  if  there  is  no  record  of  experience  to 
show  that  there  is  a  greater  risk  assumed  under  a  sawmill  schedule  with  a 
basis  rate  of  $2.50  than  under  a  school  schedule  with  a  basis  rate  of  50  cents, 
how  can  it  be  determined  that  these  rates  are  fair  and  reasonable  ?  In  other 
words,  has  not  the  questioner  as  much  proof  of  the  inequity  of  the  several 
rates  as  the  defender  has  of  their  correctness,  that  is  to  say,  none  at  all? 
How  could  those  promulgating  rates  justify  them  to  the  public?  In  other 
words,  the  critics  claimed  that  the  associations'  rates  were  not  based  on  classi- 
fied statistics. 

It  was  stated  with  reference  to  one  association  that  "there  are  no  figures 
officially  gathered  which  will  accurately  reflect  the  ratio  of  losses  to  premiums 
in  exchange  territory.  Practically  all  rating  is  done  independently  of  other 
rating  organizations  upon  bases  and  schedules  peculiar  to  the  exchange,  and  it 
should  be  considered  as  a  matter  of  importance  to  ascertain  the  premium  rate, 
the  premium  volume  and  the  loss  ratio,  in  order  to  test  the  results  of  its  rat- 
ing methods.  It,  therefore,  seems  almost  incredible  that  no  systematic  effort 
was  ever  made  by  any  one  in  authority  to  ascertain  these  figures."  This  was 
claimed  to  be  true  both  as  regards  classes  of  risks  and  aggregate  business.'*' 
The  attempts  to  gather  statistics  for  rate-making  were  alleged  to  be  few  and 
far  between,  and  on  a  number  of  occasions  important  rate  changes  were  based 
upon  incomplete  and  unsatisfactory  data.  In  a  statement  by  the  New  York 
Superintendent  of  Insurance  the  following  appeared  :'^^  "It  is  a  noteworthy 
fact  that,  with  the  exception  of  rates  on  very  few  classes,  the  rating  associa- 


'■'■•'  Annual  Report  of  the  Superintendent  of  Insurance  of  Missouri,  for  1912,  p.   14. 

<«'  Report  on  Examination  of  New  York  Fire  Insurance  Exchange.  July  21,  1913.     New 

York  Insurance  Department,  pp.  10,  95,  125.     (Hereafter  referred  to  as  "Report.") 
(T)  THE  MARKET  WORLD  AND  CHRONICLE,  1913,  p.   91.     See  also  Report,   pp.   95. 

99,  106  and  107. 

39 


tions  are  obliged  to  grope  their  way  without  the  aid  of  the  statistical  ex- 
perience of  the  companies  for  whom  the  rates  are  made.  It  is  in  evidence  that 
the  associations  on  various  occasions  requested  their  members  to  furnish  fig- 
ures on  certain  classes,  and  when  the  association  succeeded  in  obtaining  a 
fair  volume  of  figures  it  was  considered  worthy  of  comment.  With  the  ex- 
ception of  competitive  rates,  changes  in  rates  have  been  made  in  the  past  for 
two  reasons:  First,  because  one  or  more  companies  discovered  that  a  certain 
class  proved  unprofitable,  the  result  generally  being  an  advance  in  that  class; 
second,  because  a  distinct  class  of  insurers  would  band  themselves  together, 
collect  from  sources  available  to  them  statistics  regarding  the  premiums  and 
losses  in  that  class  and  then  threaten  to  form  or  insure  in  mutuals  unless  the 
rates  in  the  class  in  question  were  lowered;  and,  generally,  such  action  was 
followed  by  a  reduction  in  rates." *^' 

To  appreciate  the  situation  which  is  here  complained  of  one  must  know 
the  origin  and  purpose  of  the  classification  of  figures  kept  by  the  various 
companies.  They  were  prepared  for  the  purpose  of  competition,  in  order  to 
measure  the  profitableness  of  writing  various  classes  of  risks.  Such  lists 
were  maintained  at  heavy  expense,  for  each  policy  written  had  to  be  carefully 
examined  to  determine  the  class  of  risk.  A.  F.  Dean  cites  an  instance  of  a 
risk  of  $5,000,  wrongly  classified,  which  affected  the  loss  ratio  of  one  class 
25  per  cent  and  of  the  other  class  nearly  100  per  cent,  which  illustrates  the 
necessary  degree  of  care.^"'  They  were  and  are  guarded  as  secrets  by  each 
company — regarded  as  a  kind  of  stock  in  trade.  In  earlier  days,  when  one 
company  not  only  could  but  was  forced  to  make  its  own  rates  because  of  lack 
of  co-operation,  these  classifications  served  in  a  crude  way  as  a  scale  by  which 
to  measure  rates.  At  the  present  time,  when  companies  are  compelled  to 
carry  all  classes  of  risks,  desirable  and  undesirable;  when  companies  co- 
operate, to  some  extent  at  least,  to  make  rates;  when  competition  is  keen  and 
the  margin  of  profit  small  as  compared  with  earlier  periods;  the  usefulness  of 
these  classifications  in  their  present  form  has  ended.  The  following  table,  ^'"' 
covering  a  number  of  companies  for  a  five-year  period  and  showing  the  best 
and  poorest  loss  ratio  (from  the  standpoint  of  the  company),  is  sufficient  to 
give  an  idea  of  their  unreliability: 

Showing   of  Any  One  Company   as   Regards 
Class    No.  Lowest   Loss   Ratio.     Highest   Loss  Ratio. 

1 .00  1.11 

2 10  2.13 

3 00  1.31 

4 ' C6  1.88 

5 18  1.69 

6 03  .92 

In  discussing  this  phase  of  the  public's  criticism  we  may  dismiss  at  the 


<s>  For   an   example   of  successful   results  of   such   a   pracedure  see   the   report   of   the 
'     Fire  Insurance  Committee.   National  Convention  of  Building  Managers,   reported 
in    "Building   Management,"    August,    1911,    said    Committee   having   prepared    an 
interesting  comparison  of  about  160  office  buildings. 
<">  A.  F.  Dean,   "Fire  Rating  as  a  Science." 
<^<»  A.  F.  Dean,  "Fire  Rating  as  a  Science,"  p.  74. 

40 


outset  all  question  of  the  possibility  or  desirability  of  classified  statistics  as  a 
basis  for  rates;  this  is  an  open  question  among  underwriters/"' 

There  can  be  no  doubt,  however,  that  such  statistics  would  do  much  to 
satisfy  the  public  that  the  rating  system  rested  on  a  tangible  base.  The  lack 
of  them  is  nevertheless  not  traceable  to  underwriters'  associations,  but  rather 
exists  in  spite  of  the  efforts  of  these  bodies.  Evidently  the  spirit  of  co- 
operation among  the  companies  is  not  strong  enough  to  induce  them  to 
surrender  certain  figures  which,  in  their  hands,  are  weapons  of  competition, 
but  in  the  possession  of  the  associations  would  be  a  defense  against  dis- 
crimination. It  is  of  record  that  various  associations  have  often  used  every 
effort  to  secure  statistics  which  would  better  enable  them  to  make  rates  in 
particular  localities.  Their  failure  is  but  an  instance  where  co-operation  has 
failed  to  abolish  privately-kept  statistics  which  are  relics  of  former  com- 
petition. 

Furthermore,  regardless  of  the  extent  cf  accuracy  of  a  schedule  itself, 
considerable  opportunity  for  its  imperfect  application  was  claimed  to  exist. 
In  a  former  section"''  some  of  the  more  important  schedules  used  by  a  large 
association  were  described.  A  great  variety  of  rules  are  applied  in  the  work 
of  using  these  schedules,  which  are  of  extreme  importance  to  the  insured  and 
should  be  available  for  reference  by  all  members  of  the  association.  In  some 
case.:,  however,  no  properly  codified  sets  of  rules  were  possessed  and  since  no 
one  rater  was  familiar  with  all  the  rules  the  natural  consequence  was  that 
uniformity  in  their  application  was  impossible.  No  attempts  have  been  made, 
however,  by  the  associations  to  keep  these  rules  secret.  On  the  contrary, 
of  late  years  they  were,  in  many  cases,  published  in  the  bulletins  issued  by 
the  exchanges.  The  early  rules  which  still  remained  in  force,  nevertheless, 
were  unknown  to  brokers.  Knowledge  of  a  large  number  of  the  rules  became 
the  possession  of  a  few  brokers,  through  long  experience  or  otherwise,  and 


<"^  Some  authors,  including  underwriters,  admit  the  value  of  classified  data,  whereas 
many  others  deny  that  its  collection  is  possible  and  some  its  usefulness  if  it  could 
be  collected.     For  the  first  view  see 

David   Rumsey,    "A    Suggestion   for   a   Method    for   the    Control   of   Fire   Insurance 
Rates,"   THF  MARKET   WORLD  AND   CHRONICLE,   December  6,    1913,   p.    722. 

Report  of  the  New  York  Legislative  Investigating  Committee,  1911,  p.  68. 

Report   of    Special    Committee    on    L'niform    Classification    of    Fire    Insurance    Ex- 
perience, National  Association  of  Insurance  Commissioners,  1913. 

Report  of  the  Insurance  Commissioner  of  New  York,   1913.     See  alsb  THE  MAR- 
KET WORLD  AND  CHRONICLE,   February  28,   1914,  p.   292.  ; 

E.  G.   Richards,   "Classification — Discrimination,"  address  before  Insurance  Society 
of  New  York,  1913. 

E.  G.  Richards,  "Why  I  Believe  in  Classified  Experience,"  address  before  Insurance 
Library  Association  of  Boston,  1916. 

E.  G.  Richards,  "Experience  Grading  and  Rating  Schedule,"  1916. 

For  the  latter  viewpoints  see  A.  F.  Dean,  "Classification"  and  "Classified  Ex- 
perience." For  an  example  of  an  attempt  at  classification  see  the  Reports  of  the 
Texas  State  Rating  Board  and  E.  G.  Richards,  "Experience  Grading  and  Rating 
Schedule,"  1916.  See  also  the  author's  "Co-operation  and  Classification  in  Fire 
Insurance,"  Quarterly  Journal  of  Economics.  August.  1916. 
<^>  See  "Local  Underwriters'  Associations."  p.  15. 

41 


this  gave  them  an  advantage  over  less  fortunate  competitors,  and  the  clients 
of  the  former  benefits  not  possessed  by  those  of  the  latter.  Charges  for  ex- 
posure were  formerly  assessed  by  a  "judgment"  system,  but  of  late  years 
there  has  been  considerable  extension  of  the  use  of  "exposure  tables."  Rules 
are  necessary  to  govern  the  application  of  the  tables  to  the  different  classes 
of  risks  and  in  addition  to  these  numerous  special  rules  and  office  practices 
obtained  in  many  associations  which  materially  modified  and  even  completely 
waived  the  application  of  the  exposure  charge.  In  the  case  of  one  of  the 
most  efficient  of  local  associations  it  required  several  months  to  produce  a 
fairly  complete  enumeration  of  these  rules  and  practices. 

Often  such  rating  rules  are  rather  old.  Some  were  obtained  by  existing 
associations  as  an  inheritance  from  their  predecessors,  others  they  have  them- 
selves adopted  from  time  to  time.  In  the  formulation  of  such  rules,  and  par- 
ticularly the  older  ones,  consistency  has  not  always  been  the  principal  con- 
sideration. As  a  result,  when  a  risk  on  the  border  line  between  two  schedules 
was  rated  by  one,  a  rate  was  produced  wholly  inconsistent  with  the  rate  which 
would  have  been  obtained  by  the  application  of  the  other.  The  transfer  of  a 
mercantile  risk  with  many  occupants  to  the  manufacturing  schedule  because 
of  a  slight  change  in  occupancy  has  been  cited  as  an  example. 

Schedule  rating,  the  advantages  of  which  were  enumerated  in  a  previous 
section,'"*  while  producing  reasonable  justice  as  between  risks  of  the  same 
class,  does  not  necessarily  eliminate  unfair  discrimination  between  different 
classes  of  risks.  One  large  association  may  employ  in  its  rating  activities  as 
many  as  twenty  schedules,  and  many  of  the  schedules  are  not  designed  pri- 
marily to  harmonize  with  each  other.  There  is  also  opportunity  for  class 
favoritism  in  the  preparation  of  schedules.  Despite  its  title  the  Universal  Mer- 
cantile Schedule  is  not  universally  applied  in  its  original  form,  and  its  use  in 
modified  form  is  generally  confined  to  the  larger  cities  in  New  England  and 
the  Middle  States.  Even  in  such  places  it  applies  only  to  certain  classes  of 
risks,  and  numerous  other  schedules  upon  different  plans  are  employed  for 
other  classes.  Furthermore,  similar  hazards  may  be  differently  charged  for  by 
different  schedules.  This  is  referred  to  in  a  later  section  i;nd2r  the  headin'? 
"Discriminations   Between    Localities"    (p.    48). 

The  above  two  criticisms,  namely,  the  failure  to  collect  statistics  to  sup- 
port rates  and  neglect  of  providing  a  codified  set  of  rating  rules  which  would 
be  harmonious,  were  fairly  directed  against  the  associations.  As  regards  the 
first  of  these,  laws  should  have  been  enacted  penalizing  companies  for  failure 
to  furnish  data  upon  which  to  base  rates.  The  enactment  of  statutes  would 
have  relieved  the  companies  of  the  fear  that  they  alone  were  furnishing  data, 
while  others  refrained  from  doing  so  and  made  unfair  use  of  such  of  their 
competitors'  figures  as  they  could  obtain.  Under  such  laws  the  associations 
could  have  enforced  compliance  with  their  requests.  At  the  present  time  the 
alternative  seems  to  be,  furnish  the  data  to  the  associations  or  furnish  it  to 
the  State  under  a  State  rating  system.     In  the  light  of  their  past  experience 


<w)  "^    Survey   and    Classification    of   Fire    Underwriters'    Associations    in    the    United 
States,"  p.  3, 

42 


with  State  rating  systems,  there  is  little  doubt  as  to  the  companies'  choice. 
These  criticisms,  however,  and  many  that  follow,  are  only  indications  of  the 
imperfections  and  abuses  of  the  rate-making  system.  They  do  not  in  any  way 
affect  the  contention  that  underwriters'  associations  are  the  most  economical 
means  of  performing  the  work  yet  discovered,  and  that  they  perform  certain 
other  economic  functions  which  were  described  in  preceding  articles. 

In  the  territory  covered  by  a  large  urban  exchange  the  risks  rated  by 
schedule  form  but  a  part  of  the  total.  There  still  remains  to  be  considered 
that  large  class  which  takes  minimum  rates,  i.  e.,  dwellings,  churches,  schools, 
etc.,  or  "preferred  risks."  In  large  measure,  what  has  been  previously  said 
applies  also  to  these  risks,  for  it  was  claimed  that  they,  too,  were  granted  a 
rate  which  lacked  the  support  of  loss  statistics.  This  class  was  but  one  of 
the  many  lumped  together  in  the  aggregate  figures.  Mr.  Hess  in  his  testi- 
mony stated:  "The  Dean  Schedule  does  not  cover  dwellings.  On  the  aggre- 
gate loss  theory  it  is  not  possible  to  state  how  much  the  companies  make  or 
lose  on  dwellings.  It  is  possible  under  this  theory  for  the  rates  on  some 
classifications  to  be  too  low  and  others  too  high.  We  have  no  way  of  telling 
what  the  losses  are  on  each  classification."^"*  Minimum  rated  risks  and 
schedule  rated  risks,  therefore,  subject  themselves  to  criticism  for  the  same 
reason.  How  can  it  be  shown  that  the  minimum  rates  granted  are  just  and 
reasonable  in  the  absence  of  classified  loss  statistics?  Mr.  Hess  stated  that 
it  is  possible  that  the  rates  on  some  classes  might  have  been  too  high.  Since 
nine-tenths  of  the  dwellings  are  owned  or  rented  by  persons  of  moderate 
means,  without  influence,  is  not  this  the  class  likely  to  be  charged  exorbitantly? 
Because  of  the  lesser  hazard  which  must  necessarily  be  present  in  this  class 
as  compared  with  some  others,  and  the  consequent  actual  but  not  relative  low- 
ness  of  the  rate  it  is  easier  to  collect  a  little  additional  from  this  class  than 
from  others  more  hazardous.  It  might  be  presumed  that  the  property  owner 
would  have  protested  if  he  thought  the  rate  was  high.  The  companies  would 
show  him  that  every  one  who  owned  a  dwelling  was  paying  that  rate,  and  the 
difficulty  he  would  have  of  forming  a  combination  of  dwelling  owners  can  be 
imagined.  Secondly,  a  protest  against  factory  rates  is  a  business  matter,  but 
the  questioning  of  a  dwelling  rate  means  time  and  trouble  outside  of  business 
hours.  Thirdly,  as  was  stated  by  the  Insurance  Commissioner  of  New  York, 
the  way  to  obtain  a  reduction  is  to  band  together  and  collect  from  available 
sources  statistics  of  premiums  and  losses;  and  this  is  plainly  almost  impossible 
in  this  class. 

However,  it  is  unnecessary  to  point  out  the  reasons  why  such  discrimina- 
tion was  present  since  there  is  evidence  that  it  has  existed.  The  term  "pre- 
ferred" is  rightly  applied  to  these  risks,  because  underwriters  do  prefer  them; 
unless  they  yielded  a  larger  profit  what  reason  for  such  preference  would 
exist?  Mr.  James  A.  Waterworth,  a  Missouri,  rate  expert,  said,  "Dwellings 
and  minor  business  houses,  frequently  stores  below  and  dwellings  above,  and 
generally  the  small  stores  throughout  the  city,  are  known  as  preferred  risks 


<">  Annual  Report,  Superintendent  of  Insurance  of  Missouri,  1912,  p.  12. 
<'5)  Report  of  Superintendent  of  Insurance  of  Missouri,   1912,   p.   13. 

43 


because  they  are  considered  more  profitable  to  the  companies."^'"  If  the  name 
applied  to  these  risks  and  the  testimony  of  raters  were  not  sufficient  evidence, 
the  actions  of  the  companies  would  be.  Competition  for  this  particular  business 
is  very  keen.  All  companies  insist  upon  brokers  giving  them  their  due  pro- 
portion of  this  class  of  business  and  are  always  willing  to  accept  more  than 
their  share.  Larger  commissions  are  paid  for  securing  these  risks  and  many 
companies  will  not  accept  more  hazardous  risks  from  agents  and  brokers  unless 
judiciously  "mixed"  with  "preferred"  business.  It  has,  therefore,  been  the 
practice  of  brokers  to  deliver  "lines"  of  insurance  in  bulk,  using  the  preferred 
risks  to  offset  the  poorer  risks,  and  their  profit  partly  depends  upon  their 
ability  to  skilfully  mix  risks. 

This  question  of  dwelling  rates  has  been  discussed  in  the  more  progressive 
journals.  The  Chicago  correspondent  of  The  Economic  World  wrote:""* 
"The  rates  on  dwellings  in  Illinois  outside  of  Cook  County  are  much  like  those 
in  other  Western  States,  and  they  are  high  enough  so  that  most  of  the  com- 
panies appear  anxious  for  the  business  at  the  rate.  But  inside  the  County,  in 
towns  with  paved  streets,  waterworks,  paid  fire  departments,  electric  alarms 
and  telephones  in  nearly  every  house,  rates  are  far  and  away  higher  than  in 
villages  outside  with  almost  primitive  protection.  *  *  *  These  rates  can- 
not be  defended."  The  editor  of  this  journal,  in  the  same  issue,  states:  "Now, 
this  state  of  things  is  not  confined  to  Cook  County,  Illinois.  It  is  to  be  found, 
in  a  greater  or  less  degree  of  unfairness,  inequitableness  and  departure  from 
consistent  uniformity,  in  all  parts  of  the  country  where  the  pressure  of  com- 
petition has  taken  the  form  of  striving  for  the  largest  possible  share  of  an 
over-profitable  business,  rather  than  meeting  the  demands  of  able  bargainers 
among  buyers  of  insurance." 

It  is  not  an  answer  to  policyholders,  it  is  contended,  to  allege  that  higher 
rates  exist  because  of  higher  commissions  to  agents.  The  matter  of  commis- 
sions is  to  be  settled  between  companies  and  agents;  the  policyholder  has 
no  voice  in  fixing  the  amount  to  be  paid  agents  and,  therefore,  cannot  be  com- 
pelled to  suffer  because  it  is  high.  The  owners  of  dwellings  seem  to  be  in 
the  peculiar  position  of  paying  more  premiums,  by  reason  of  the  high  com- 
missions, in  order  that  the  companies  may  extract  from  them  more  profit. 
They  offer  a  little  more  inducement  to  come  and  get  their  business,  because  it 
is  profitable,  than  the  same  agents  could  obtain  for  writing  a  more  hazardous 
factory,  warehouse,  or  mercantile  building.-''*  In  New  Zealand,  where  State 
fire  insurance  has  been  in  force  for  eight  years,  the  greatest  reduction  in  rates 
claimed  has  been  on  dwellings — 33%  per  cent. 

The  factors  considered  in  the  rating  of  a  risk  may  be  divided  into  three 


(16)  rpjjp,  MARKET  WORLD  AND   CHRONICLE,   January   13,   1912,   p.   35. 

<">  See  letter  of  one  manager  to  New  York  Fire  Insui'ance  Exchange  with  reference 
to  an  increase  in  rates  on  household  furniture  in  brick  dwellings,  in  which  he 
says:  "Not  only  is  its  exceeding  sweetness- drawing  many  'flies'  that  are  increas- 
ing the  competition  both  fair  and  unfair,  but  the  companies  have  no  right  to 
advance  rates  on  property  that  they  are  willing  to  pay  an  agents'  commission  on 
of  35%  in  addition  to  other  expense  direct  or  indirect  of  not  less  than  10  or  15%." 
Report,  p.  102. 

44 


groups,  construction,  occupancy  and  exposure.  Complaints  have  been  made 
of  the  rules  and  methods  adopted  by  exchanges  for  the  measurement  of  ex- 
posure. It  has  been  stated  that  "the  rules  and  their  application  have  moreover 
resulted  in  injustice  and  absurd  inconsistencies,  which  discredit  the  judgment 
of  the  underwriters  responsible  for  such  conditions."  Failure  to  modify  ex- 
posure tables  to  conform  to  improvements  in  protection  and  the  existence  of 
little  known  exposure  rules  are  claimed  to  have  resulted  in  great  variation  in 
the  exposure  charge  as  applied  to  risks  rated  by  different  schedules,  and,  in 
fact,  as  applied  to  risks  rated  on  the  same  schedules,  but  belonging  to  different 
classes,  as  well  as  in  the  relationship  of  the  exposure  charge  as  applied  to 
stock  or  contents  when  compared  with  the  exposure  charge  applied  to  build- 
ings. With  regard  to  one  city  it  has  been  stated  that  "The  exposure  table 
has  remained  practically  unchanged  during  the  thirteen  years  of  the  existence 
of  the  exchange.  The  use  of  the  table  during  that  period  has  been  steadily  ex- 
tended, until  it  now  covers  almost  all  classes  of  risks,  and  its  application, 
where  used,  has  in  recent  years  become  more  rigid.  As  a  result,  the  exposure 
charge  now  constitutes  a  more  important  element  of  the  rates  fixed  by  the 
exchange  than  at  any  other  period  of  its  existence.  And  this,  notwithstanding 
that  the  exposure  hazard  has  been  materially  lessened  by  the  installation  of 
the  high  pressure  system,  and  an  increased  efficiency  of  the  fire-fighting  force. 
*  *  *  The  high-grade  public  protection  against  fire  has  a  tendency  to 
equalize  the  exposure  hazard  from  risks  of  varying  character,  although  under- 
wi'iters  fail  to  recognize  it  in  the  rating." 

Injustice  also  results,  it  is  alleged,  from  unfair  discriminations  between 
classes  in  the  exposure  charge,  resulting  from  difference  in  the  basis  rates  or 
the  application  of  different  schedules.  For  example,  a  sculptor's  studio  fur- 
nished a  basis  for  a  greater  exposure  charge  than  a  newspaper  printing  plant. 
Risks  exhibiting  dangerous  conditions  suffer  an  increase  in.  rates  therefrom, 
which  results  in  increased  rates  on  neighboring  risks  through  the  exposure 
charge.  Nevertheless,  associations  have  refused  to  divulge  the  reasons  for  the 
advanced  rates  to  interested  and  affected  neighbors  and  have  not  assumed  it 
to  be  part  of  their  duties  to  co-operate  with  the  fire  prevention  authorities 
to  have  the  improper  conditions  remedied. 

One  of  the  objects  for  which  insurance  associations  exist  is  the  improve- 
ment of  construction  and  the  reduction  of  fire  waste.  Fire  rates  are  the 
greatest  factor  in  effecting  good  construction  and  improving  poor,  because  of 
the  direct  pecuniary  interest  involved.  Fire  insurance  companies  have  prom- 
ised property  owners  for  some  time  that  if  proper  precautions  were  taken 
and  losses  reduced,  premiums  would  be  lowered.  Of  the  devices  for  reducing 
fire  damage  the  automatic  sprinkler  is  one  of  the  most  important.  When  the 
fire  becomes  hot  enough  to  melt  solder  on  a  sprinkler  head  the  place  is  flooded 
with  water.  This  is  a  device  which  has  proved  very  effective  and  many  owners 
of  mercantile  and  factory  buildings  have  installed  it.  Under  the  present 
method  of  aggregate  loss  statistics,  how  do  these  owners  know  they  have  been 
granted  the  proper  reductions?  Some  of  the  rates,  upon  risks  equipped  with 
automatic  sprinklers,  it  is  certain,  have  been  made  without  the  assistance  of 
any  guiding  statistics  or  any  knowledge  of  what  aggregate  profit  is  made  on 

45 


this  class  of  business.  In  one  large  city  the  rates  upon  sprinkler  risks  were 
not  reduced  until  competition  by  factory  mutuals  forced  this  action,  and  then 
those  risks  already  insured  with  mutual  companies  and  those  threatened  with 
competition  were  first  considered.  The  restricted  sprinkler  schedule  here  was 
concededly  devised  to  meet  competition,  and  apparently  the  changes  in  it  and 
the  rules  applying  to  it  have  generally  been  made  owing  to  mutual  com- 
petition. 

The  preceding  attempts  to  give  some  idea  of  the  conditions  which  were 
believed  by  the  public  and  the  legislators  to  exist  in  fire  insurance,  as  regards 
discrimination  between  classes  of  risks. *'^'  In  addition  different  kinds  of 
policies,  localities  and  particular  risks  suffered  it  was  believed  because  of 
abuses  of  the  system  of  rate-making.  Because  of  the  suspicion  with  which 
business  combinations  of  all  kinds  were  regarded,  every  instance  of  this  kind 
was  exaggerated  and  every  particular  instance  considered  a  general  condition. 
No  effort  was  made  to  ascertain  whether  the  associations  possessed  advantages 
which  offset  the  disadvantages,^"^  and  an  antipathy  was  consequently  engen- 
dered which  demanded  the  abolition  of  all  forms  of  co-operation. 

Thus  far  ^^*  a  cause  of  the  public  enmity  toward  underwriters'  associa- 
tions was  sought  in  the  discrimination  which  was  believed  to  exist  be- 
tween classes  of  risks.  Other  causes  of  anti-compact.  State  rating  and 
regulative  laws  were  discriminations  between  kinds  of  policies,  between  dif- 
ferent localities  and  particular  risks.  While  some  contended  that  rates  in  gen- 
eral were  too  high,  it  was  generally  admitted  that  any  real  cause  for  criticism 
must  be  found  in  the  pernicious  practice  of  favoring  some  risks  as  compared 
with  others. 

Discriminations  Between  Kinds  of  Policies. 

Pire  insurance  policies  may  be  divided  into  three  classes,  according  to  their 
duration.  Annual  policies  are  customary.  There  also  exist,  however,  "term" 
policies  having  durations  of  three  and  five  years  and  "short  term"  policies  or 
insurance  for  less  than  one  year.  The  object  of  insuring  for  three  or  five 
years  in  preference  to  one  year  is  to  obtain  a  so-called  "term"  rate,  which  is 
lower,  proportionately,  than  the  annual  rate  on  the  same  property.  The  rate 
for  a  term  of  three  years  is  usually  only  double  the  annual  rate  and  for  a  term 
of  five  years  only  triple  the  annual  rate.  The  justification  for  these  rates  has 
long  been  a  mystery  to  the  public,  largely  because  they  could  not  be  reconciled 
with  certain  contentions  of  the  underwriters.  If  the  annual  rate  is  proper, 
fair  and  only  adequate  to  cover  losses,  expenses,  contingencies  and  a  five  per 
cent  profit,  as  has  been  claimed,  how  can  insurance  for  five  years  be  granted 
at  a  lower  rate  ?  On  the  other  hand,  if  the  five  and  three  year  or  "term"  rates 
are  sufficient  to  cover  these  various  items,  why  should  a  higher  rate  be  charged 
for  one-year  policies? 


t'^>  All   of   the    criticisms    contained    in    this   section,    it    is   to    be    understood,    are   not 

endorsed  by  the  author. 
(19)  rjy^iQ  very  important  economic  function  of  the  associations  have  been  described. 
<')  Page  36. 

46 


There  are,  of  course,  some  elements  which  are  not  currently  taken  into 
account,  two  of  these  being: 

(1)  The  interest  which  is  earned  on  the  larger  amount  paid  in  as  a  pre- 
mium at  the  beginning  of  the  term,  on  the  term  basis,  and 

(2)  The  saving  in  expense  due  to  writing  five  years'  insurance,  say,  at 
one  time. 

Suppose  we  have  a  risk  bearing  an  annual  rate  of  $1.15  which  is  granted 
a  term  rate  of  $3.45  for  five  years'  insurance.  The  apparent  difference  be- 
tween the  two  rates  is  $2.30,  which,  however,  is  partly  accounted  for  by  the 
two  elements  just  named.  Let  us  assume  that  the  term  premium  is  received  at 
the  beginning  of  the  term  and  the  annual  premium  on  the  first  of  each  of  the 
five  years.  We  may  assume  that  the  company  will  earn  interest  on  the 
amounts  held,  considering  the  nature  of  the  funds;  that  losses,  on  the  average 
are  paid  in  the  middle  of  the  year  and  consume  55  per  cent  of  premiums;  that 
expenses  amount  to  35  per  cent;  conflagration  fund,  5  per  cent;  and  profit, 
5  per  cent.*''  If  figures  were  available  showing  the  interest  which  might  be 
earned  by  the  company  on  funds  on  hand  it  would  be  possible  to  compute  the 
saving  in  the  form  of  interest  which  results  from  the  collection  of  a  term 
premium.  For  example,  out  of  an  annual  premium  of  $1.15  paid  in  at  the 
beginning  of  the  first  year  of  the  term  must  be  taken  35  per  cent  for  expenses, 
leaving  74.75  cents.  For  half  a  year  this  sum  earns  interest  and  in  the  middle 
of  the  year  losses  of  63.25  cents  (55  per  cent  of  $1.15)  must  be  paid,  leaving 
a  small  remainder  to  accumulate  at  interest  for  the  remaining  half  year.  At 
the  beginning  of  the  second  year  a  second  premium  of  $1.15  is  paid  and  the 
process  repeated.  If,  however,  a  term  premium  of  $3.45  is  collected  at  the 
beginning  of  the  first  year  and  expenses  of  40  cents  are  deducted,  the  sum  of 
$3.05  remains  to  earn  interest  for  one-half  year.  At  the  end  of  this  time  63" 
cents  is  paid  out  for  losses,  leaving  $2.41  to  accumulate  at  interest  for  one-half 
year.  It  can  be  seen  that  there  is  a  considerable  gain  in  interest  and  saving  in 
expense  on  the  term  plan  from  the  standpoint  of  the  company. 

There  are,  however,  two  other  elements  which  have  not  been  considered: 

(1)  The  advantage  of  keeping  the  business,  and 

(2)  Of  having  on  hand  the  premium,  whether  earned  or  not,  in  case  of  loss. 

These  are  advantages  to  the  insurer  difficult  to  estimate,  and  it  is  a  mat- 
ter of  opinion  whether  they  would  be  of  sufficient  advantage  to  compensate 
for  the  44  cents  difference  in  premium  receipts.  It  must  be  acknowledged, 
however,  that  a  high  estimate  has  been  made  of  the  saving  in  expense.  On 
the  other  hand,  the  risks  which  are  granted  term  rates  are  usually  of  a  less 
hazardous  nature  and  losses  on  them  would  probably  be  less  than  the  average 
of  55  per  cent  of  premiums,  while  losses  on  others  would  probably  be  greater 
than  the  average.  In  general,  the  conclusion  may  be  drawn  that  the  difference 
complained  of  between  annual  and  term  rates  has  usually  been  exaggerated. 

Term  rates  are  not  granted  to  all  classes  of  risks,  and  with  respect  to  the 
favored  ones  practices  vary  with  different  sections  of  the  country.    Some  risks 


<*>  Report  on  Insurance  to  Senate  and  Assembly  of  New  York,  February  1,   1911. 

47 


cannot  be  insured  for  more  than  one  year;  others  may  be,  but  must  pay  the 
full  annual  premium  without  reduction  for  the  longer  term;  others  may  be  in- 
sured for  long-  terms  by  increasing  the  premium  by  one-half  for  each  year 
over  one,  and  still  others  by  increasing  the  premium  by  three-fourths  for  each 
year  after  the  first.  Furthermore,  the  risks  are  not  placed  in  these  groups 
because  of  peculiar  characteristics  or  established  classifications,  but  are  shifted 
from  time  to  time  "without  any  definite  guiding  principle  or  standard.'"  '  The 
reasons  which  are  said  to  justify  term  rates  are  (1)  that  they  tie  up  the  busi- 
ness longer,  (2)  that  a  larger  amount  of  interest  is  earned,  (3)  that  the  ex- 
pense is  reduced,  and  (4)  that  they  provide  a  premium,  whether  earned  or  not. 
available  if  loss  occurs.  As  far  as  buildings  are  concerned,  why  should  there 
be  a  distinction  in  the  ratio  of  term  rates  to  annual  rates,  considering  these 
factors?  Which  of  these  reasons  applies  to  one  class  of  buildings  and  not  to 
another  ?  So  far  as  can  be  seen,  none  of  them  affords  any  basis  for  discrimina- 
tion between  classes.  The  most  important  objection,  therefore,  to  term  rates 
is  the  arbitrary  manner  of  allowing  them  on  some  risks  and  not  on  others.  A. 
F.  Dean  says,  "If  this  (a  standard  scale  for  long  term  rates)  were  adopted  as  a 
standard,  and  as  universally  observed  as  our  present  short  rate  standard,  it 
would  have  two  excellent  results.  First,  it  would  stop  the  growing  confusion 
in  our  tabulated  annual  statistics,  caused  by  the  ominous  growth  of  term  risks. 
Second,  it  would  prevent  discrimination  in  favor  of  the  man  with  ready  cash 
who  cannot  put  it  to  more  profitable  use  than  to  save  a  year's  premium  on  his 
three-year  policies.     *     *     *  "<*> 

As  regards  short  term  risks,  the  situation  is  considerably  better.  Several 
such  tables  have  been  promulgated,  including  that  of  the  Western  Union,  and 
these  tables  are  usually  applied  to  risks  regardless  of  class. 

What  has  been  said  above  regarding  long  and  short  term  risks  serves  to 
illustrate  the  conditions  which  exist  in  business  where  co-operation  is  absent  or 
restricted.  If,  even  with  the  assistance  of  associations  and  boards,  non- 
uniformity  exists,  the  situation  under  unrestricted  and  unprincipled  competi- 
tion may  well  be  imagined.  It  is  probable,  for  instance,  that  instead  of  the 
Western  Union  table  for  short  rates  being  generally  applicable  throughout  the 
Middle  West,  every  company  would  establish  any  standard  of  measurement  it 
thought  proper  or  advisable,  and  the  extent  of  discrimination  would  be  only 
limited  by  the  ability  of  the  powerful  to  force  concessions  from  the  companies. 

Discrimination  Between  Localities. 

A  third  type  of  discrimination  is  that  which  differentiates  between  locali- 
ties; and  an  evil  which  was  apparent  even  to  underwriters  was  the  failure  to 
harmonize  and  relate  the  rates  of  different  parts  of  the  country.  Co-operation 
has  to  a  large  extent  established  a  relation  between  the  rates  on  all  the  risks 
within  the  territory  of  individual  exchanges,  but  co-operation  had  not  then  and 
has  not  yet  reached  the  stage  where  any  definite  relation  can  be  shown  to 


<•'>  A.  F.  Dean,  "Standardization,"  Proceedings,  42d  Annual  Meeting,  Fire  Underwrit- 
ers'  Association  of  the  Northwest. 
<*>  A.  F.  Dean,  "Standardization,"  Proceedings,  42d  Annual  Meeting,  Fire  Underwrit- 
ers' Association  of  the  Northwest. 

48 


exist  between  the  rates  on  particular  classes  of  risks  in  New  York  and  in  San 
Francisco,  for  example.  Commenting  upon  the  system  of  rating  in  1901,  A.  F. 
Dean  said,  "We  construct  a  basis  schedule  of  each  State,  but  cannot  show  that 
it  bears  any  logical  relation  to  the  schedules  of  other  States.  We  say  that  each 
individual  rate  is  the  sum  of  a  basis  rate  combined  with  certain  charges  and 
credits,  but  cannot  show  whether  this  basis  rate  is  relatively  correct  when 
compared  with  others,  nor  can  we  show  that  the  charges  and  credits  which 
permeate  many  classes  are  consistently  imposed  upon  each  class.  This  naive 
disregard  of  relations  crops  out  not  only  in  the  comparison  of  every  existing 
basis  tariff  with  other  tariffs,  but  in  the  comparison  of  parts  of  the  same  tariff 
with  other  parts. "^"*  Selecting  ten  tariffs  Mr.  Dean  compared  their  charges 
for  specific  defects,  and  rearranging  his  table,  it  shows  the  following:^*' 

Number  of  Times  Am'ts  of  Different 

Some  Charge  Appears  Charges  Made 

in  all  Tariffs.  for  Same  Defect. 

[4  5  cents 

Awnings,    wood,    on    one-story    building J  4  10 

[  1  20 

r        2  5 

Lighting  by  other  than  gas  or  \         27  10 

electricity     ]  5  '  15 

[26  25 

r        3  5 

Metal  stack  through   roof   (metal  |  1  15 

roof)     ]  9  25 

[  3  50 

These  are  three  examples  picked  from  a  list  of  thirty-two  at  random, 
which  serve  to  show  the  inconsistencies  in  charges.  It  is  doubtful  if  the  same 
extent  of  inconsistency  can  be  found  to-day,  for  rating  methods  steadily  im^ 
prove,  but  similar  differences  can  be  found,  even  if  not  of  the  same  extent. 
Quoting  again  from  the  same  authority :^^^  "It  would  be  a  truism  to  say  that 
in  the  face  of  inconsistencies  so  glaring,  explanation  or  defense  is  impossible. 
The  public  contention  that  rates  are  made  *by  guess  and  begad'  is  susceptible 
of  proof  from  the  documentary  evidence  contained  in  our  own  tariffs.  It  mat- 
ters not  that  *  *  receipts  and  disbursements  come  out  exactly  even,  if 
taken  for  decade  periods;  in  other  words,  that  indemnity  as  a  whole  is  prac- 
tically sold  at  average  cost.  Our  failure  to  make  a  profit  does  not  concern  the 
public,  but  our  failure  to  maintain  reasonably  true  rate  relations  offends  the 
sense  of  relation  which  is  instinctively  the  basis  of  every  reasoning  process. 
Even  low  rates  that  are  inequitable  are  an  offense  to  common  intelligence." 

Within  the  last  year  or  so  the  relation  of  the  rates  on  urban  dwellings 
to  those  on  suburban  risks  has  been  the  subject  of  contention.  There  is  quite 
a  difference  between  a  farm  building,  subject  to  burning  for  an  hour,  perhaps, 
through  the  failure  of  untrained  volunteer  firemen  to  respond  or  by  their  lack 
of  knowledge  and  efficient  apparatus,  and  a  city  dwelling,  surrounded  by  hun- 


<^'  A.  F.  Dean:     "Fire  Rating  as  a  Science,"  p.  53  et  seq. 

<6>  Ibid.,    p.    53. 

<T'  A.  F.  Dean:     "Fire  Rating  as  a  Science,"  p.  54. 

49 


dreds  of  volunteer  firemen  and  within  ten  minutes'  journey  of  an  improved 
chemical  engine.  Yet  in  some  States  practically  no  allowance  was  made  for 
the  difference  in  hazard  due  to  municipal  water  supply  and  fire  departments. 
Thus  at  one  time,  for  example,  the  rate  on  frame  dwellings  in  the  State  of 
Illinois  was  40  cents,  with  no  charge  added  for  exposure,  while  dwellings  in 
Chicago,  with  water  supply  and  fire  department,  paid  50  cents  and  a  charge 
for  exposure  in  addition.*"  Even  the  Illinois  Commission,  assisted  in  its  in- 
vestigation by  a  prominent  underwriter,  which  rendered  the  most  favorable 
State  report  on  conditions  in  the  fire  insurance  business  prior  to  the  New  York 
report,  was  compelled  to  say,  "It  is  very  hard  to  escape  the  conclusion  that 
owners  of  dwellings  in  Chicago  are  grossly  overcharged."*  ' 
Discrimination  Between  Particular  Risks. 
More  unfair,  however,  than  discrimination  between  classes  of  risks,  kinds 
of  policies  and  localities,  are  discriminations  between  individual  risks.  This 
type  of  favoritism  has  been  considerably  diminished  of  recent  years,  but  still 
exists  to  some  extent.  An  agent  represents  sometimes  as  many  as  twenty 
different  companies.  In  order  to  place  large  risks  without  dividing  his  com- 
missions with  other  agents  this  is  a  necessity,  for  the  companies  restrict  the 
amount  they  will  write  on  any  one  risk  in  order  to  obtain  good  distribution. 
The  agent  has  a  lot  of  smaller  risks  which  all  the  companies  desire  and  urge 
him  to  supply  them  with,  even  maintaining  special  agents  to  see  that  they 
receive  their  share  of  such  "preferred"  risks.  He  also  has  some  risks  which 
no  company  wants  at  the  price  offered.  The  agent,  under  the  compulsion  of  the 
owners  of  the  large  but  poor  risks,  takes  advantage  of  this  situation  and 
shrewdly  mixes  the  good  with  the  poor,  offering  the  lot  in  bulk  to  the  various 
companies.  All  or  none  must  be  taken,  and  by  careful  mixing  and  the  com- 
petition of  the  companies,  the  agent  usually  succeeds  in  placing  his  risks.  The 
existence  of  the  preferred  risks,  which  he  wants,  thus  compels  the  manager  of 
a  company  to  accept  other  risks  at  inadequate  premiums.  The  large  risks  are 
able  to  command  such  advantages  solely  because  of  their  size,  the  large  com- 
missions obtained  by  the  writing  and  the  competition  of  the  companies. 

The  manner  in  which  companies  may  compete  in  rates  is  shown  by  an 
illustration  by  L.  W.  Zartman.*'*"  "Let  us  assume  that  a  risk,  say  a  factory, 
is  offered  to  the  company;  the  company  wants  the  business,  but  competition  is 
keen  and  a  competitive  rate  must  be  named.  To  find  out  this  competitive  rate 
it  is  only  necessary  to  analyze  the  expenditure  of  the  company.  The  total 
premium  income,  in  general,  is  paid  out  as  follows: 

Losses    55  per  cent 

f  Commissions     15  per  cent 

Salaries   of   special   agents 5  per  cent 

Home   office   expenses 15  per  cent 

Taxes    3  per  cent 

Profit    7  per  cent 


<s>  Report  of  the  Illinois  Fire   Insurance   Commission,   to  the   47th  General   Assembly, 

p.   57. 
<»>  Ibid,,   p.   57. 
<'">  L.  W.  Zartman:     "Yale  Readings  in  Insurance,"  New  Haven. 

50 


"If  the  burning  ratio  on  the  class  to  which  the  factory  in  question  belongs' 
is  $0,825  per  hundred,  in  order  to  get  the  current  rate  of  profit,  to  charge  the 
factory  its  proportion  of  the  fixed  expenses  and  to  pay  the  agent  the  regular 
commission,  the  company  would  have  to  name  a  rate  of  $1.50  per  hundred  on 
the  factory.  It  will  not  charge  that  rate  if  a  lower  rate  is  necessary  to  secure 
the  business  from  a  rival,  and  it  need  not  in  order  to  make  acceptance  of  the 
business  profitable,  as  the  expenses  for  special  and  home  office  force  will  con- 
tinue whether  that  risk  is  accepted  or  not,  and  both  of  these  can  be  ignored  in 
making  the  rate.  The  tax  will  have  to  be  paid,  and  some  commission  to  the 
local  agent,  though  at  times  the  agent  is  willing  to  take  a  smaller  commission 
in  order  to  induce  the  company  to  accept  the  risk.  Therefore,  a  company  can 
fix  a  rate  of  $1.00  on  the  risk  and  still  make  a  profit  as  follows: 

Expected    loss    $0,825 

Taxes .03 

Commission     .10 

which  make  a  total  expense  of  $0,955,  leaving  a  profit  of  nearly  5  per  cent  to 
the  company  upon  the  transaction,  even  with  the  heavy  reduction  in  rate."  It 
is  unnecessary  to  point  out  that  some  other  risks  bear  this  factory's  propor- 
tion of  the  expense,  which  it  did  not  pay. 

The  above  illustrates  exactly  the  situation  which  would  prevail  universally, 
and  has  prevailed  universally,  without  the  existence  of  some  means  of  re- 
stricting competition,  such  as  underwriters*  associations.  When  such  associa- 
tions were  mentioned  by  the  writer  to  an  officer  of  a  very  large  corporation 
the  latter  said:  "Oh,  they  aren't  of  great  account.  When  we  talk  to  a  broker 
about  placing  our  business  we  always  tell  him  that  if  he  has  in  mind  an  under- 
writers' association  rating  he  is  just  wasting  his  time.  We  won't  have  any- 
thing to  do  with  them."  This  is  the  most  potent  argument  that  could  be  ad- 
vanced in  justification  of  such  co-operation.  This  large  corporation,  through 
the  value  of  its  large  insurance  business,  induces  companies  to  compete,  obtains 
a  lower  rate  than  its  competitors  can  hope  for,  and  thus  compels  underwriters 
to  disregard  the  agency  which  they  have  established  to  promulgate  uniform 
rates. 

A  study  of  these  associations  shows  that  from  them  result  in  fire  insur- 
ance the  many  direct  and  indirect  advantages  which  follow  co-operation  in  any 
business  pursuit,  and  in  addition  the  technical  character  of  this  particular  busi- 
ness renders  their  existence  especially  valuable,  both  to  the  companies  and  the 
public.  As  with  every  other  economic  agency,  however,  the  same  power  which 
in  general  renders  public  service  may  be  utilized  in  some  instances  and  to  some 
extent  for  private  gain  and  to  the  general  detriment.  Thus  the  Interstate 
Commerce  Commission  unofficially  recognizes  now  that  railroad  traffic  asso- 
ciations are  absolutely  necessary  in  present-day  land  transportation;  Con- 
gressional committees  realize  that  agreements  between  steamship  lines  are  the 
only  solution  of  certain  water  transportation  difficulties;  and  yet  it  is  also 
seen  that  certain  abuses  of  the  existing  system  are  liable  to  become  prevalent. 
So  in  fire  insurance  co-operation  was  a  certain  misuse  of  power  introduced, 
insignificant  in  comparison  with  the  general  improvement  of  present  methods 
over  old,  but  which  legislators  desired  to  eliminate. 

51 


These  evils  in  the  midst  of  good  may  be  briefly  outlined  as  follows: 

1.  Discrimination  between  classes  of  risks: 

A.  Inability  to  justify  basis  rates  by  classified  statistics; 

(1)  Failure  of  associations  in  collecting  statistics; 

(2)  Incompleteness  of  the  figures  in  existence. 

B.  Diversity  and  imperfect  compilation  of  rules  for  rating. 

C.  Lack  of  harmony  between  class  schedules. 

D.  Overcharge  on  "preferred"  risks. 

■  E.  Absence  of  relation  between  exposure  charges. 

2.  Discrimination  between  kinds  of  policies: 

A.  Term  rates. 

3.  Discrimination  between  localities: 

A.  Lack  of  harmony  between  schedules  of  various  localities. 

B.  Inconsistencies  of  urban  and  suburban  rates. 

4.  Discrimination  between  particular  risks: 

A.  "Mixing"  risks. 

B.  Making  reductions  for  large  lines. 

Many  difficulties  in  the  treatment  by  legislators  of  this  common  phe- 
nomenon were  created  by  the  mistake  of  applying  old  legal  principles  indis- 
criminately to  new  conditions.  Thus  the  mere  fact  that  fire  insurance  com- 
panies combined  in  rate-making  and  that  such  combination  did  not  immediately 
perfect  conditions  caused  them  to  be  placed  in  the  category  of  evil  trusts, 
and  their  interconnection  to  be  abolished  at  all  costs.  This  section  was  in- 
tended to  show  the  origin  of  such  an  attitude;  the  development  of  resulting 
legal  restriction  from  the  prohibitory  basis  to  the  regulatory  principle  remains 
to  be  discussed. 


THE  LEGAL  STATUS  OF  FIRE  UNDERWRITERS  ASSOCIATION 

T[T  is  almost  unnecessary  to  point  out  that  the  power  of  the  several  States 
^  to  regulate  the  business  of  insurance  within  their  respective  borders  is 
derived  from  the  decisions  of  the  United  States  Supreme  Court  in  Paul  vs. 
Virginia  (1868)^'^  and  New  York  Life  Insurance  Company  vs.  Deer  Lodge 
County,  Montana  (1914). ^^^  In  the  first  of  these  the  court  enumerated  the 
principle  that  contracts  of  insurance  "do  not  constitute  a  part  of  the  com- 
merce between  the  States"  but  are  "local  transactions"  and  "governed  by  the 
local  law";  in  the  second  case  the  court  reaffirmed  this  principle.  Improper 
conditions  are,  therefore,  not  remediable  by  the  application  of  any  of  the  Fed- 
eral statutes  relating  to  interstate  commerce,  but  the  regulation  of  this  busi- 
ness consists  entirely  of  the  diverse  and  ever-changing  laws  of  the  various 


<'>  8  Wall,  168. 

<^'  United  States  Supreme  Court,  Spring  Term,  1914. 

The  Supreme  Court  of  the  District  of  Columbia  dismissed  a  bill  for  injunction  to 
restrain  the  Home  Life  Ins.  Co.  of  New  York  from  continuing  as  a  member  of 
the  Underwriters'  Association  of  the  district.  It  held  that  the  Sherman  Act  did 
not  apply  to  insurance. 

52 


states.     The  activities  of  fire  insurance  associations  iftay  be  restricted  in  any 
of  four  ways: 

(1)  By  virtue  of  the  common  law,  in  the  absence  of  statutes  specifically 

limiting  the  manner  of  doing  business. 

(2)  Under  "anti-trust"  laws,  either  in  the  form  of 

(A)  General   anti-trust   laws,   of  the   nature  of  the   well-known 

Federal  "Sherman  Act,"  governing  all  kinds  of  business,  or 

(B)  Statutes    governing   insurance   companies    only   or   specially 

mentioning  these  as  included  within  their  scope. 

(3)  By  means  of  State  rating  laws  which  are  either 

(A)  Laws  providing  that  the  State  shall  prescribe  maximum  or 

actual  rates,  or 

(B)  Laws  which  require  that  all  rates  must  be  approved  by  some 

State  authority. 

(4)  By  acts  providing  for  the  supervision  of  rate-making  in  certain  par- 

ticulars by  State  officials  having  power  to  prevent  abuses. 
The  Common  Law. 

It  is  probable  that  insurance  companies  might  have  escaped  molestation 
for  many  years  had  it  not  been  for  the  inauguration  of  the  once-popular  an- 
tipathy to  combinations  of  all  kinds.  In  this  insurance  associations  could  not 
fail  to  be  included  and  a  multiplication  of  suits  under  the  common  law  was 
the  result. 

The  common  law  doctrine  with  respect  to  restrain  of  trade  has  been 
briefly  stated  as  follows:  "Contracts  that  were  in  unreasonable  restraint  of 
trade  at  common  law  were  not  unlawful  in  the  sense  of  being  criminal,  or  giv- 
ing rise  to  a  civil  action  for  damages  in  favor  of  one  prejudicially  affected 
thereby,  but  were  simply  void,  and  were  not  enforced  by  the  courts."^^^  "Where 
the  sole  object  of  both  parties  in  making  the  contract  as  expressed  therein  is 
merely  to  restrain  competition,  and  enhance  or  maintain  prices,  it  would  seem 
that  there  was  nothing  to  justify  or  excuse  the  restraint,  that  it  would  have  a 
tendency  to  monopoly,  and  therefore  would  be  void."**' 

The  courts  have  uniformly  refused  to  consider  associations  of  fire  under- 
writers, having  for  their  purpose  the  fixing  and  maintenance  of  rates,  as 
illegal  or  void  per  se.*^'  Even  where  the  term  "unlawful"  has  been  applied  by 
the  courts  to  associations  of  this  nature,  as  in  Beechley  vs.  Mulville,  it  has 
probably  been  used  in  the  sense  of  extra-legal,  rather  than  as  meaning  that  it 
furnished  a  ground  for  criminal  or  civil  action.  In  several  cases  this  attitude 
has  been  maintained  even  though  the  court  seemingly  admitted  that  it  consid- 
ered the  particular  defendant's  actions  as  a  restraint  of  trade.     Thus  it  was 


<='>  United  States  vs.  Addystone  Pipe  &  Steel  Co.,  85  Fed.  271. 

<*'  Roller  Co.  vs.  Cushman,  143  Mass.  353:  Gloucester  Isinglass  &  Glue  Co.  vs.  Russia 

Cement  Co.,   154  Mass.   92:   Continental  Ins.   Co.   vs.   Board  of  Fire  Underwriters 

of  Pacific,  67  Fed.   310. 
<3>  Harris  vs.  Commonwealth,  73  S.  E.  561  (1912):  Beechley  vs.  Mulville,  102  Iowa  602; 

Metzger  vs.   Cleveland,  13  Ins.  L.  J.   855:  Queen  Ins.  Co.  vs.  Texas,  86  Tex.   250; 

Continental   Ins.    Co.   vs.   Fire  Underwriters   of  Pacific,   67  Fed.    310;   Aetna   Ins. 

Co.   vs.   Commonwealth.   106  Kj*.   864. 

53 


said:  "The  most  that  can  be  said  as  to  the  combination  to  fix,  regulate  and 
control  the  business  of  fire  insurance  in  the  city  of  Newport  News  is  that  it 
was  an  agreement  in  restraint  of  trade.  But  agreements  merely  in  restraint 
of  trade  are  not  illegal  in  the  sense  that  they  are  either  indictable  or  action- 
able."^®* Contracts  to  maintain  rates  are,  however,  extra-legal  and  unen- 
forceable/^* In  Harris  vs.  Commonwealth,  the  court  quoted  Mogul  S.  S.  Co. 
vs.  McGregor,  as  follows:  "Contracts  as  they  are  called,  in  restraint  of  trade, 
are  not,  in  my  opinion,  illegal  in  any  sense,  except  that  the  law  will  not 
enforce  them.  It  does  not  prohibit  the  making  of  such  contracts.  It  merely 
declines,  after  they  have  been  made,  to  recognize  their  validity.  The  law 
considers  the  disadvantage  so  imposed  upon  the  contract  a  sufficient  shelter  to 
the  public"  (p.  563).  Parties  thereto  cannot  resort  to  the  courts  for  enforce- 
ment or  for  redress  against  an  associate.  In  Beechley  vs.  Mulville  it  was  said: 
"Of  this  combination  plaintiff  was  a  member.  The  penalties  imposed,  among 
which  is  that  of  'removal  of  all  companies  from  the  offending  member,'  are 
specified  in  the  compact,  and  his  name  is  signed  thereto.  He  is  himself  one  of 
the  conspirators  who  devised  and  put  in  operation  that  which  caused  his  in- 
jury. *  *  *  j^  (,an  be  said,  undoubtedly,  that  plaintiff  has  caused  the  injury 
of  which  he  complains  by  his  unlawful  acts."^"' 

Such  associations  may  be,  and  have  been,  attacked,  however,  on  grounds  of 
public  policy.  Under  such  circumstances  it  must  be  shown  that  the  restraint 
exercised  is  unreasonable  and  affects  the  public  interest,  or  is  employed  with 
respect  to  an  article  of  necessity.*"*  "In  cases  like  this  the  decisive  question 
then  is:  Is  the  rule  a  reasonable  trade  regulation,  or  an  unlawful  restriction 
upon  the  right  of  the  individual  to  employ  in  the  conduct  of  his  business  such 
legitimate  means  as  are  needed  to  successfully  carry  it  on?  If  it  is  not  a 
reasonable  business  regulation,  it  should  not  be  upheld.  *  *  *  "d")  -pj^^ 
view  is  well  supported  that  insurance  is  affected  with  a  public  interest  and  is 
at  least  of  a  quasi-public  nature.*"'  "The  conclusion  that  we  reach  from  these 
considerations  is  that  the  business  of  the  defendants  is  in  point  of  fact  one  that 
directly  affects  the  interests  of  the  public  *  *  *  and  *  *  *  in  point 
of  law  *  *  *  is  affected  with  a  public  interest."*'"  The  New  Jersey 
Chancery  Court  stated  that  insurance  companies  are  not  public  or  quasi-public 
bodies,*^"  in  an  opinion  which  was  overruled.  Insurance  is,  furthermore,  not  a 
necessity  of  life  and  not  indispensable.*"* 

Successful  actions  at  common  law  against  underwriters'  associations  have 


<6>  Harris  vs.  Commonwealth,  73  S,  E.,  p.  563. 

<T>  Harris  vs.  Commonwealth,  73  S.  E.  561;  Beechley  vs.  Mulville,  102  Iowa  602;  Metz- 

ger  vs.  Cleveland,  13  Ins.  L.  J.  855. 
<8>  102  Iowa,  610. 

<»>  Louisville  Board  of  Fire  Underwriters  vs.  Johnson,  119  S.  W.  153  (1909). 
*!«>  Louisville  Board  of  Fire  Underwriters  vs.  Johnson,  119  S.  W.  157  (1909). 
<">  McCarter  vs.  Firemen's  Fund  Ins.  Co.,  16  Atl.  80  (1909);  Citizens  Ins.  Co.  vs.  Clay, 
et  al.,  197  Fed.  435  (1912);  Queens  Ins.  Co.  vs.  State,  102  S.  W.  1048  (reversed  on 
appeal). 
<i2>  McCarter  vs.  Firemen's  Fund  Ins.  Co.,  73  Atl.  85  (1909). 
^")  McCarter  vs.  Firemen's  Fund  Ins.  Co.,  et  al.,  61  Atl.  705  (1905). 
<"'  Harris  vs.  Commonwealth,  73  S.  E.  561  (1912). 

54 


been  few  in  number,  but  several  of  the  associations'  acts  have  been  declared 
to  be  illegal.  Thus,  where  efforts  were  made  to  regulate  rates,  commissions 
and  the  intercourse  of  members  and,  it  was  alleged,  to  boycott  certain  com- 
panies, if  such  efforts  could  have  been  plainly  shown  to  have  been  the  actions 
of  the  association,  the  decision  would  have  had  to  be  against  it.*'^'  Provisions 
prohibiting  members  from  writing  insurance  for  non-members;  from  having 
more  than  two  agents  with  offices  in  the  congested  portion  of  a  city;  from 
disclosing  the  manner  of  making  rates  to  anyone  except  a  member  of  the  board 
expressly  designated  by  the  owner  of  the  risk;  provisions  requiring  the  can- 
celation of  risks  written  at  other  than  the  board  rates;  and  the  practices  of 
adding  charges  for  faults  of  management,  etc.,  without  giving  notice  that  such 
charges  were  removable  if  the  faults  were  remedied;  and  of  notifying  members 
of  the  final  rate  without  giving  details,  are  contrary  to  public  policy,  illegal 
and  void.""  Other  decisions  have  held  the  delegation  of  rate-making  powers 
to  an  association  to  be  ultra  vires  an  insurance  company'""  ar.d  a  by-law 
stating  that  "no  member  of  this  board  shall  take  the  agency  of  a  company 
which  has  already  an  existing  agency  in  a  city"  to  be  reasonable  and  not 
illegal. 

Statutes  Prohibiting  Combinations  in  General. 

Several  attempts  were  made  to  bring  fire  insurance  exchanges  within  the 
scope  of  a  common  type  of  statute  which  prohibits  combinations,  contracts, 
agreements,  etc.,  in  restraint  of  "trade,"  "commerce,"  "business,"  "dealings  in 
commodities,"  "products,"  etc.  The  following  law  of  Iowa"'*  furnishes  an 
illustration  of  this  general  type  of  law,  which  exists  in  many  other  States^"* 
and  is  hereafter  referred  to  as  "anti-trust"  legislation. 

Pools  and   Trusts. 

"Any  corporation  organized  under  the  laws  of  this  or  any  other  State  or 
country  for  transacting  or  conducting  any  kind  of  business  in  this  State,  or 
any  partnership,  association  or  individual,  creating,  entering  into  or  becoming 
a  member  of  or  a  party  to  any  pool,  trust,  agreement,  contract,  combination, 
confederation  or  understanding  with  any  other  corporation,  partnership,  asso- 
ciation or  individual,  to  regulate  or  fix  the  price  of  any  article  of  merchandise 
or  commodity  or  to  fix  or  limit  the  amount  or  quantity  of  any  article,  com- 
modity or  merchandise  to  be  manufactured,  mined,  produced  or  sold  in  this 
State,  shall  be  guilty  of  a  conspiracy." 

Cases  involving  such  statutes  have  principally  raised  the  question  of 
whether  their  general  terms  included  insurance,  and  decisions  have  usually 
been  to  the  effect  that  they  do  not.  Thus  in  several  cases  it  has  been  declared 
that  insurance  is  not  "trade"  nor  a  "commodity"  within  the  meaning  of  these 
words  as  used  in  the  acts."^'  "We  conclude  that  the  word  must  be  construed 
in  a  mo:e  restricted  sense,  and  as  synonymous  with  'traffic'     *     *     *     j^^^ 


"^>  Continental  Ins.  Co.  vs.  Board  of  Fire  Underwriters  of  Pacific,  67  Fed.  310  (1895). 
"«>  State  vs.    Board   of   Underwriters   of  Allegheny   County,    Court   of   Common   Pleas. 

Pittsburgh,  Pa.,  May  7,  1913. 
06I)  McCarter  vs.  Firemen's  F\ind  Ins.  Co.,  et  al.,  73  Atl.  85. 
<'•'  Code  of  Iowa,  1897,  Sect.  5060. 

55 


it  does  not  embrace  the  business  of  insurance,  which  is  trade  only  in  the  sense 
that  it  is  an  occupation  or  employment.  *  *  *  It  is  only  by  a  strained 
construction  that  the  word  commerce  can  be  made  to  embrace  the  business  of 
insurance.  *  *  *  Insurance  is  neither  produced,  consumed,  manufactured, 
transported,  nor  sold  in  the  ordinary  signification  of  any  of  these  words,  and 
therefore  it  is  not  within  'the  plain  import'  of  the  language  employed  in  the 
act."^""^  The  above  objections  were  successfully  overcome  in  Texas  by  the 
insertion  in  the  statute  of  the  word  "business."^-'^  It  is  evident  that  general 
statutes  of  the  nature  we  have  been  discussing,  in  order  to  include  insurance 
within  their  scope,  must  be  specific  and  accurate  in  wording/"^ 


<iS)  Tj^g  following  is  a  list  of  State  anti-trust  statutes,  not  specifically  mentioning  in- 
surance, with  their  citations,   existing  January  1,  1914: 

Alabama,   Code  1907,   Chap.   69,   Sect.   7579  et  seq. 

Arizona,  Laws  1912,  Chap.  73. 
— ^.California,  Laws  1909,  Chap.  362. 

Colorado,  Laws  1913,  Chap.   161. 

District  of  Columbia,  U.   S.   Statutes  at  Large  209,   Sup.  2d  d.,   762. 

Hawaii,   Revised  Laws,   Sect.   31O0. 

Idaho,  Laws  1909,  p.  297. 

Idaho,  Laws  1911,  Chap.  215,  p.  688. 

Illinois,   Laws  1891,  p.   78,  amended  to  1901. 

Indiana,    Bums   Annotated    Statutes,    19'08,    Sect.    3878,    et   seq..    Sect.    3884    et   seq., 
and  Sect.   3889  et  seq. 

Iowa,  Code  1897,   Sect.  5060,  and  Laws  1909,   Chap.  255. 

Kentucky,  Russell's  Statutes,  1909,   Sect,  3717  et  seq. 

Louisiana,  Laws  1890,  Act  86,  and  Laws  1892,  Act  90. 

Maine,  Revised  Statutes  1903,   Chap.  47,  Sect.  53  et  seq..  Laws  1913,  Chap.   106. 

Massachusetts,   Laws   1908,    Chap.   454,    Sect.    1   et  seq..   Laws   1911,   Chap.   503,   and 
Laws  1912,   Chap.   651. 

Michigan,  Laws  1899,   No.   255,  and  Laws  19C5,  Act  329. 

Minnesota,  General  Statutes  1913,  Sect.  8973  et  seq. 

Montana,  Laws  1909,  Chap.  97,   Sect.   1  et  seq. 

New  Jersey,   Laws  1913,   Chap.   13. 

New  Mexico,   C.   L.   1897,   Sect,   1292. 

New  York,  Consolidated  Laws,  Chap.  20,  Sect.  340  et  seq. 

North  Carolina,  Laws  1913,  Chap.   41. 

North  Dakota,  Laws  1907,   Chap.  259. 

Ohio,   General   Code  1910,   Sect.   6391   et  seq. 

Oklahoma,  Revised  Laws,  Sect.  8220,  and  Laws  1908,  p.  750. 

Porto  Rico,  Revised  Statutes,  Sect.  2373. 

South  Dakota,   Laws  1909,   Chap.   224. 

Tennessee,  Laws  1903,   Chap.   140. 

Utah,    Hammond   and    Smith's   Compiled   Laws   1907,    Sect.    1753   et   seq. 

Wisconsin,    Sanborn    and    Berryman's    Wisconsin    Statutes,    Sect.    1791,    and    Laws 
1905,  p.   944. 

Florida  and  one  or  two  other  States  have  laws  applicable  to  certain  industries, 
which  have  not  been  included  in  the  above  list,  inasmuch  as  they  are  not  ap- 
plicable to  insurance.  See,  for  example,  Florida  General  Statutes  1906,  Sect, 
3160,  referring  to  meats  and  other  edibles, 
<!»>  Queen  Ins.  Co.  vs.  Texas,  86  Tex.  250,  interpreting  Act  of  March  30,  1889;  Aetna 
Insurance  Co.  vs.  Commonwealth,  106  Ky.  864  (1899);  State  vs.  American  Surety 
Co.,  133  N.  W.  235  (1911),  interpreting  Art.  2,  Chap.  91a,  Comp.  Stat.  Nebraska, 
1911.     Reversed   in   135   N.   W.    365    (1912). 

56 


Specific  Anti-Compact  Laws. 

Owing  to  this  necessity  for  definiteness  it  became  the  practice  to  spe-  j 
cifically  enumerate  insurance  as  included  within  the  scope  of  the  various  ' 
acts/^'     The  following  law  of  Arkansas^^*^  is  an  illustration  of  the  type.  j 

Anti-Trust    Regulations. — Defining    Conspiracy   to    Regulate    Prices. 

Sec.  142.  Any  corporation  organized  under  the  laws  of  this  or  any  other 
State,  or  country,  and  transacting  or  conducting  any  kind  of  business  in  this 
State,  or  any  partnership  or  individual,  or  other  association  or  persons  what- 
soever, who  are  now,  or  shall  hereafter  create,  enter  into,  become  a  member 
of,  or  a  party  to,  any  pool,  trust,  agreement,  combination,  confe4eration  or 
understanding,  whether  the  same  is  made  in  this  State  or  elsewhere,  with  any 
other  corporation,  partnership,  individual,  or  any  other  person  or  association 
of  persons  to  regulate  or  fix  either  in  this  State  or  elsewhere  the  price  of  any 
article  of  manufacture,  mechanism,  merchandise,  commodity,  convenience,  re- 
pair, any  product  of  mining,  or  article  or  thing  whatsoever,  or  the  price  or 
premium  to  be  paid  for  insuring  property  against  loss  or  damage  by  fire, 
lightning  or  tornado,  or  to  maintain  said  price  when  so  regulated  or  fixed,  or 
who  are  now,  or  shall  hereafter  enter  into,  become  a  member  of,  or  a  party  to 
any  pool,  agreement,  contract,  combination,  association,  or  confederation, 
whether  made  in  this  State  or  elsewhere,  to  fix  or  limit  in  this  State  or  else- 
where, the  amount  or  quantity  of  any  article  of  manufacture,  mechanism,  mer- 
chandise, commodity,  convenience,  repair,  any  product  of  mining,  or  any  article 
or  thing  whatsoever,  or  the  price  or  premium  to  be  paid  for  insuring  property 
against  loss  or  damage  by  fire,  lightning,  storm,  cyclone,  tornado,  or  any 
other  kind  of  policy  issued  by  any  corporation,  partnership,  individual  or  asso- 
ciation of  persons  aforesaid,  shall  be  deemed  and  adjudged  guilty  of  a  con- 
spiracy to  defraud  and  be  subject  to  the  penalties  as  provided  by  this  Act. 
(Sec.  1,  Act  1,  1905.) 

Propriety  and  Scope  of  Anti-Compact  Laws. 

Inasmuch  as  the  power  to  regulate  insurance  rests  entirely  with  the  States, 
combinations  to  prevent  competition  in  rates  have  been  held  proper  subjects 


<-•"'  Queen  Ins.  Co.  vs.  Texas,  86  Tex.  264,  265. 

<=^*  Amer.    Fire  Ins.    Co.   vs.    State,    7-5   Miss.    24    (1S97).      Xoyes.    "Intercorporate   Rela- 
tions,"   Sect.   435,   footnote. 
<2=>  Queen  Insurance  Co.  vs.  Texas,  86  Tex.   250. 

(23)  The  following  laws  enumerating  insurance  as  covered  by  their  provisions  existed 
January  1,  1914: 
Arkansas,   Laws  1905,  Act.  1,   Sect.   1  et  seq.,  as  amended  by  Laws  1913,  Act.  161. 
^  Kansas,   Laws   1889,   Chap.    257,   Sect.    1;   General  Statutes,   Sect.   5185;   Laws  1897, 
Chap.   265,  Sect.  1;  and  General  Statutes,   Sect.  5142. 
Mississippi,  Code  19C6,  Sect.  5002.  as  amended  by  Laws  1908,  Chap.  119,  Sect.  1. 
Missouri,   Revised   Statutes  1909,   Chap.   98,  as  amended  by  Laws  1913. 
Nebraska,    Cobbey's   Annotated    Statutes    1911,    Sect.    12,000    et   seq.    and    Compiled 

Statutes  1911,   Sect.   62S1. 
South   Carolina,   Civil  Code  1912,   Sect.   2437  et  seq. 
Texas,  General  Laws  1903,  Chap.  XCIV,  p.  119,  as  amended  by  General  Laws  1907, 

and  Revised   Civil   Statutes  1911,   Art.   1454. 
Missouri  now  has  a  law,  however,  providing  for  supervision. 

57 


for  the  exercise  of  State  powers.  Where  a  State  legislates  against  "trusts" 
this  term  may  be  made  to  include,  by  definition,  such  a  combination  as  above 
mentioned.  Thus  in  State  vs.  American  Surety  Company/-^^  the  court  said  in 
relation  to  a  statute  of  Nebraska:  "Evidently  the  words  'trade  and  business' 
are  intended  as  a  generic  term  to  embrace  all  the  transactions  and  practices 
set  forth  in  the  preceding  section,  and  properly  include  the  regulation  of  insur- 
ance contracts  in  restraint  of  competition."  In  German  Alliance  Insurance 
Company  vs.  Hale,^"®^  such  laws  were  regarded  as  a  valid  exercise  of  the 
State's  police  power.  The  courts  have  held  that  an  act  providing  for  the 
expulsion  from  the  State  of  any  foreign  company  participating  in  a  pool  or 
combination  was  within  the  power  of  the  State,  which  had  no  limitation  by 
State  or  Federal  constitution/"'* 

The  question  of  the  extent  of  application  of  a  State  law  to  combinations 
and  agreements  made  outside  the  State  is  a  doubtful  one.^'** 
Constitutionality  of  Anti-Compact  Laws. 

Statutes  designed  to  prohibit  rate-making  associations  have  been  attacked 
as  contrary  to  the  State  and  Federal  constitutional  provisions  regarding  the 
right  of  contract,  equal  protection  and  due  process  of  law. 

The  first  of  these  was  introduced  as  a  basis  of  complaint  in  the  case  of 
Greenwich  vs.  Carroll,^-"'  and  the  decision  at  first  favored  the  contention, 
stating  that  the  law  prevented  fire  insurance  companies  from  making  contracts 
which  other  persons  might  make,  such  as  laborers  fixing  the  price  of  their 
labor.  The  verdict  of  the  Circuit  Court  was  reversed,  however,^'"*  and  the  law 
in  question^''*  held  not  to  contravene  the  State  or  Federal  constitutions. 

A  law  which  provides  that  any  insurance  company  connected  with  a  tariff 
association  should  be  liable  for  125  per  cent  of  any  loss  or  damage^'"*  has  been 
considered  not  to  deprive  the  company  of  the  equal  protection  of  the  laws  or 
deny  it  due  process  of  law.^^''*  A  provision  that  such  a  company  could  not 
enforce  the  stipulations  of  the  standard  fire  policy  requiring  notice  and  proof 
of  loss  was  held  equally  valid.  ^^^ 

Devices  to  Evade  Anti-Compact  Laws. 

Wherever  questioned  the  attempts  to  accomplish  the  same  objects  without 
violating  the  laws  have  been  unsuccessful.     Thus  where  agents  had  formed 


<2*«  Insurance  Laws  of  Arkansas,   1913,   Chap.   XV,   Sect.   142,   p.   69. 

(=3)  State  vs.  American  Surety  Co.,  135  N.  W.  365  (1912),  reversing  133  N.  W.  235  (1911). 

<2«>  German  Alliance  Ins.   Co.   vs.   Hale,   21   S.   C.   246   (1911);   see  also  Firemen's  Fund 

Ins.   Co.  vs.   Hellner,   49   So.   297   (1909). 
(-•'  Hartford  Fire  Ins.  Co.  vs.  Perkins,   125  Fed.  502   (1903). 
<=s>  See  Hartford  Fire  Ins.   Co.  vs.   State,  89  S.  W.  42  (1905),  and  State  vs.  Lancashire 

Fire  Ins.   Co.,   66   Ark.   466    (1899). 
(S9)  125  Fed.  121   (1903).     See  also  Niagara  Fire  Ins.  Co.  vs.  Cornell,  llO  Fed.  816. 
<80)  Carroll  vs.  Greenwich,   26  Sup.  Ct.  Rep.   66,  199  U.  S.  401   (1906). 
<2i)  Code  of  Iowa,  1S97,  Sect.  1754. 

t3=)  Alabama  Code,   1896,   Sect.   2619,   Code  1907,  Sect.  4594. 
<33)  German  Alliance  Ins.   Co.   vs.   Hale,   21   Sup.   Ct.   Rep.   246    (1911);   Firemen's  Fund 

Ins.  Co.  vs.  Hellner,  49  So.  297  (1909). 
<'♦>  Aetna   Ins.    Co.    vs.    Kennedy,    50    So.    73    (1909);    Continental   Ins.    Co.    vs.    Parkes, 

39   So.   204   (1905). 

58 


an  association,  a  requirement  of  which  was  that  they  were  not  to  forward 
policies  until  the  same  had  been  submitted  to  the  "stamping  department" ^^^ 
of  the  association,  the  court  held  that  the  acts  of  the  agents  were  the  acts  of 
the  companies,  ratified  by  the  latter  also  by  the  receipt  of  the  premiums/''* 
Upon  th?  passage  of  an  anti-compact  law  in  Missouri,  the  Association  of  Fire 
Underwriters  of  Missouri  was  dissolved  and  an  independent  rater  supplied 
books  of  rates  to  the  companies.  Agents  and  brokers  formed  a  club  known  as 
the  "Underwriters'  Social  Club"  for  the  purpose  of  maintaining  a  stamping 
department.  This  was  characterized  by  the  court  as  "a  plain,  palpable,  but 
bungling  pool,  trust,  agreement,  combination,  confederation  and  understanding, 
organized  to  avoid  said  anti-trust  statute,"  and  illegal/^'' 

In  the  light  of  the  foregoing  decisions  it  is  hard  to  see  how  insurance 
companies  can  escape  the  effects  of  statutes  specially  prepared  to  apply  to 
them,  regardless  of  the  inadvisability  of  attempting  to  do  so,  since  a  rewording 
very  simply  accomplishes  the  object  of  the  legislator.  Only  two  decisions^"*' 
have  been  found  which  upheld  the  legality  of  such  combinations  or  associations, 
under  specific  prohibitory  laws,  and  one  was  reversed  by  a  higher  court,  al- 
though the  advantageous  features  of  rate-making  associations  have  sometimes 
been  admitted. '^^^'  The  tendency  has  rather  been  to  allow  the  statutes  a  wide 
scope  than  to  limit  their  application,  and  recent  decisions  have  showTi  no 
change  in  this  attitude.  In  1912  combinations  of  this  nature,  defined  by  law  as 
"trusts,"  were  again  stated  to  be  unlawful.*"* 

State  Rating  Laws. 

The  importance  of  the  two  types  of  laws  described  was  considerably  les- 
sened, however,  by  the  recognition  of  some  States  of  the  principle  of  co-opera- 
tion. These  States,  which  unconsciously  took  the  first  step  toward  a  rational 
treatment  of  the  issue,  admitted  what  they  had  long  denied,  that  all  com- 
panies should  charge  the  same  rate,  but  determined  that  the  States  should  fix 
the  rates  charged. 

While  recent  rate  legislation  may  be  described  as  consisting  of  laws  which 
require  the  States'  supervision  of  rates  and  those  authorizing  Government 
fixing  of  rates,  it  may  be  further  classified  as 

(1)  Laws  requiring  the  filing  of  rates  with  State  officials. 

(2)  Laws  providing  for  a  revision  by  the  companies  of  rates  found  by  a 

hearing  to  be  unfair. 

(3)  Acts  creating  State  Boards  to  fix  and  enforce  rates. 

(I)  The  first  type,  requiring  the  filing  of  rates,  is  illustrated  by  the  law 
of  Arkansas.^"*  Corporations  and  associations  doing  business  in  the  State  are 
required  to  file  a  schedule  of  rates  with  the  State  Auditor  or  Insurance  Com- 


'■'^'  See  pp.  14,  26. 

<'«>  State  vs.  Aetna  Ins.   Co..   150  Mo.   113   (1899). 

<^*  State  vs.  Firemen's  Fund  Insurance  Co.,  152  Mo.  1  (1899). 

ts')  Greenwich    vs.    Carroll.    125    Fed.    121    (1903);    Niagara    Fire    Ins.    vs.    Cornell,    110 

Fed.   816. 
<""  State  vs.  Aetna  Ins.   Co..   150  Mo.   113   (1899). 
<"^  State  vs.  American  Surety  Co.,  135  N.  W.  365  (1912). 
<">  Laws  1913,  Act.  159.  approved  March  12,  1913. 

59 


missioner,  and  underwriters  may  employ  a  common  expert  to  inspect  and  rate 
risks  and  advise  the  premiums  to  be  charged.  Such  premiums  must  be  uni- 
form for  all  risks  rated  under  the  same  schedule.  Such  laws  exist  in  several 
States  and  are  simply  important  as  exemplifying  the  permission  to  co-opera- 
tively determine  rates. 

(II)  An  example  of  the  second  type  is  found  in  the  law  of  Kansas, 
1909.''"  Basis  schedules  are  required  to  be  filed  with  the  Superintendent  of 
Insurance,  showing  proposed  rates  and  any  m.atters  affecting  such  rates.  Ten 
days'  notice  must  be  given  of  changes  in  rates  and  the  new  rates  filed,  unless 
otherwise  permitted  by  the  Superintendent  of  Insurance,  who  has  the  power  to 
order  changed  excessive,  unreasonable  or  inadequate  rates.  Contracts  may  be 
made  affecting  risks  for  which  no  schedule  has  been  filed,  provided  a  schedule 
is  filed  within  30  days  after  the  risk  is  written.  Schedules  and  local  tariffs 
filed  as  above  are  open  to  the  inspection  of  the  public  and  local  agents  are 
required  to  exhibit  copies  of  the  same.  Appeals  from  the  Superintendent's  de- 
cisions may  be  taken  to  the  district  courts  of  the  State. 

The  law  of  Massachusetts  provides  a  Board  of  Appeals,  consisting  of  two 
citizens  of  the  Commonwealth  and  the  Insurance  Commissioner,  to  consider 
complaints  of  unfair  or  discriminatory  rates  and  make  such  recommendations 
as  it  deems  advisable/*'^ 

The  oldest  of  the  three  acts  above  mentioned,  and  the  only  one  on  which  a 
decision  has  been  rendered,  as  far  as  known,  is  that  of  Kansas.  This  was  at- 
tacked in  the  courts  '"'  on  the  ground  that  it  was  unconstitutional,  constituting 
an  interference  with  the  right  of  private  contract,  guaranteed  by  the  Four- 
teenth Amendment.  This  view  was  not  upheld  by  the  court,  which  considered 
the  act  a  valid  exercise  of  the  State's  Police  Power.  On  April  20,  1914,  the 
United  States  Supreme  Court  decided  the  act  was  constitutional.^"*  It  was 
said  that  "business,  by  circumstances  and  its  nature,  may  rise  from  private  to 
be  of  public  concern,  and  be  subject,  in  consequence,  to  governmental  regula- 
tion. *  *  *  Contracts  of  insurance,  therefore,  have  greater  public  conse- 
quence than  contracts  between  individuals  to  do  or  not  to  do  a  particular  thing 
whose  effect  stops  with  the  individuals.  *  *  *  it  is,  therefore,  within  the 
principle  we  have  announced. "^*^* 

The  dissenting  opinion  objected  on  the  ground  that  the  majority  decision 
opened  the  way  to  State  price-fixing  on  any  sort  of  an  article.  This  is  one  of 
the  most  important  of  recent  rate  decisions. 

The  State  rating  acts  providing  for  the  actual  promulgation  of  rates  by 
the  States  remain  to  be  discussed. 

The  public  interest  in  common  law  actions  and  anti-trust  statutes  against 
underwriters'    associations    and    in    the    revision     of    rates     by    the     State 


<*=>  Laws  1909,  Chap.  152.  A  similar  law  recently  existed  in  Missouri  (Act  of  March 
18,  1911),  entitled  the  Oliver  State  Rate  Act,  but  was  practically  repealed  by  the 
Orr  Act,  March  24,  1913  (Laws  1909,  Chap.  98,  as  amended  by  Laws  1913). 

(*■>  Acts   1911,    Chap.    493. 

<"^  German  Alliance  Ins.  Co.  vs.  Barnes,  189  Fed.  769  (1911). 

(«)  German  Alliance  Ins.  Co.  vs.  Lewis,  34  Sup.  Ct.  612. 

<^*'>  German  Alliance  Ins.  Co.  vs.  Lewis,  pp.  618,  619,  620. 

60 


was    considerably    diminished    by    the    passage    of    more    radical    legislation. 

(Ill)  These  statutes,  commonly  known  as  State  rating  acts,  are  the 
ones  most  strenuously  objec1:ed  to  by  the  companies,  although  it  must  be 
recognized  that  the  laws  providing  for  revision  of  rates  by  State  officials 
practically  give  the  latter  the  authority  to  determine  what  the  rates  shall  be. 
This  result  is  not  obtained  with  the  same  ease  as  under  the  rating  acts,  how- 
ever, as  many  revisions  may  be  necessary  to  attain  the  desired  ends.  The  law 
of  Kentucky,"'  prominent  because  of  the  withdrawal  from  the  State  of  the 
companies  upon  its  passage,  may  be  selected  as  an  example  of  this  legislation, 
although  similar  laws  exist  in  Texas,  Louisiana  and  Nebraska'-'  and  were 
proposed  in  Mississippi  arid  Florida.^' 

The  super\dsion  of  rates  is  delegated  to  the  Insurance  Commissioner  and 
two  citizens  appointed  by  the  auditor,  and  for  this  purpose  the  companies  are 
repaired  to  file  general  basis  schedules,  specific  rates,  rate  cards,  inspection 
reports  of  towns  and  a  basis  schedule  of  the  Analytic  System.  These  may  be 
prepared  by  an  agent  emplt)yed  by  the  companies  in  common.  The  rating  board 
is  expected  to  consider  the  reasonableness  of  rates  and  the  selection  of  basis 
tables.  The  significant  feature  of  the  act,  however,  is  that  the  Board  may  also 
prepare  reasonable  schedules  and  after  the  promulgation  of  these  it  is  unlaw- 
ful for  any  company  to  use  a  rate  obtained  by  any  other.  The  information 
necessary  for  the  preparation  of  such  rates  the  companies  are  required  to  fur- 
nish. The  records  of  the  Board  are  open  to  public  inspection  and  the  com- 
panies' agents  are  required  to  display  the  promulgated  rates.  The  Board  has 
access  to  the  records  of  underwriters'  associations.  An  appeal  from  its  de- 
cision may  be  had  to  the  Circuit  Court  of  the  State. 

The  companies  proposed  a  substitute  for  the  above  law  which  endowed  the 
Insurance  Commissioner  with  these  powers  instead  of  a  rating  board,  on  the 
ground  that  there  would  be  less  danger  of  political  influence;  but  this  failed 
of  adoption.  The  Western  Union  considered  the  withdrawal  of  its  members 
from  the  State  because  of  dissatisfaction  with  the  act,  but  the  underwriters 
could  not  agree  on  this  action  and  decided  to  bring  a  bill  in  equity  in  the  Fed- 
eral District  Court  to  restrain  the  enforcement  of  the  act.  This  Court  decided 
against  the  companies,**'  saying  "The  business  of  fire  insurance  is  not  im- 
pressed with  a  public  use  in  the  sense  that  the  public  can  demand  service,  but 
it  has  at  least  a  quasi-public,  as  distinguished  from  a  purely  private,  char- 
acter."   Accordingly  it  was  held  that  the  act  was  within  the  power  of  the  State. 

This  was  a  great  disappointment  to  the  companies,  as  it  was  estimated 
that  the  new  law  would  cost  them  about  $90,000.*'*  Furthermore,  the  State 
Board  ordered  that  new  rates  involving  a  reduction  on  dwellings,  for  example, 
of  30  per  cent  should  go  into  effect  March  15,  1913;  but  in  March  the  reduc- 


^"  Laws  of  Kentucky.   1912,   Chap.   5. 

<=>  Texas,    1910;    Louisiana,    1910,    Act    219:    Nebraska.    Insurance    Code,    1913,    Art.    II; 

applies  only  to  surety  companies. 
<■■■'  Mississippi,  February,  1912.     See  United  States  Review.  February  22.  1912.     Florida. 

April,   1913,   House  Bill  Xo.    3. 
<*>  Citizens  Insurance  Co.  vs.  Clay,  197  Fed.  435   (1912). 
<=>  United  States  Review,  April  4,  1912. 

61 


tion  was  diminished  to  10  per  cent,  it  having  been  shown  that  the  companies 
had  made  no  profit  even  at  the  original  rate/®^ 

In  the  following  year  the  law  previously  analyzed  was  modified  slightly 
by  the  passage  of  the  Glenn-Greene  Amendment.  This  was  extremely  radical 
as  passed  by  the  House,  giving  the  Board  arbitrary  powers  subject  to  little  or 
no  restraint,  as  well  as  the  right  to  fix  maximum  rates  instead  of  the  man- 
datory rates  provided  for  in  the  original  bill.  Such  rates  would  not  have  had 
even  the  mandatory  rates'  advantage  of  preventing  price-cutting  and  dis- 
criminations, the  real  evils  in  insurance.  This  amendment  was  considerably 
modified  before  passing  the  Senate. 

The  Kentucky  rate  law  has  been  tested  in.  the  United  States  District  Court 
and  the  opinion  rendered*''  was  that  insurance  was  at  least  of  a  quasi-public 
character  and  subject,  therefore,  to  State  regulation.  The  legislature  may, 
therefore,  require  companies  to  file  data  and  appoint  a  board  to  fix  the  only 
lawful  rates,  this  constituting  no  im.pairment  of  the  rights  of  a  company  or- 
ganized in  another  State  and  licensed  to  do  business  in  Kentucky.  The  classi- 
fication of  companies  for  rate-fixing  purposes  cannot  be  considered  as  denying 
to  all  the  equal  protection  of  the  laws  and,  therefore,  is  not  unconstitutional. 

In  Nebraska,  however,  a  board  was  provided  to  establish  the  lates  to  be 
charged  by  all  surety  companies  doing  business  within  the  State.  In  an  action 
brought  by  the  American  Surety  Company  the  court  declared  that  this  was 
unconstitutional,  depriving  such  companies  of  property  without  due  process  of 
law,  in  violation  of  the  Fourteenth  Amendment. *'*' 

The  constitutionality  of  such  laws  is,  therefore,  an  open  question  at  the 
present  time,  with  a  tendency  apparent  to  hold  them  within  the  States'  powers. 
Against  such  a  tendency  we  find  the  decision  in  the  surety  case  and  certain 
defects  in  the  operation  of  these  statutes.  Likewise  a  strong  dissenting  opinion 
which  favored  the  companies  was  filed  in  the  case  of  Citizens  Insurance  Com- 
pany vs.  Clay. 

Results  of  State  Regulation/'^ 

The  earliest  attitude  of  States  toward  insurance  combinations,  as  is  natural, 
was  one  of  indifference.  While  the  common  law  was  available  for  the  redress 
of  wrongs,  either  real  or  fancied,  it  was  seldom  made  use  of,  although  one  or 
two  cases  of  comparatively  early  date  may  be  found.  Some  State  constitu- 
tions contain  prohibitions  against  monopoly  and  restraint  of  trade. *^'"  With 
the   development   of  antagonism   to  all   forms   of  combinations,  the   common 


<«>  New  York  Journal  of  Commerce,  March  8,  1913. 

<'>  Citizens  Insurance  Co.  vs.   Clay,  et  al.,  197  Fed.  435   (1912). 

<«>  American  Surety  Co.  of  New  Yorlc  vs.   Shellenberger,   et  al.,  183  Fed.   636  (1910). 

<9>  For  an  extended  discussion  of  the  historical  development  of  fire  insurance  legisla- 
tion see  the  author's  "Commonwealth  vs.  Co-operation,"  Rough  Notes,  April 
22,   1915. 

*'«)  Arkansas,  Art.  II,  Sect.  19;  Georgia,  Art.  IV,  Sect.  2,  Par.  4;  Kentucky,  Sect.  198; 
Louisiana,  Art.  CXC;  Maryland,  Art.  XLI;  Mississippi,  Sect.  198;  New  Hampshire, 
Art.  82;  North  Carolina,  Art.  I,  Sect.  31;  North  Dakota,  Art.  VII;  Oklahoma,  Art. 
IX,  Sect.  45;  South  Dakota,  Art.  XVII,  Par.  20;  Tennessee,  Art.  I,  Sect.  22; 
Texas,  Art.  I,  Sect.  26;  Washington,  Art.  XII,  Sect.  22;  Wyoming,  Art.  I,  Sect. 
30.  and  Art.  X,  Sect.  8. 

62 


law  was  deemed  inadequate  protection  and  anti-trust  statutes  became  com- 
mon.    Their  object,  in  brief,  was  to  destroy  combination  and  promote — even  ; 
enforce  competition.     By  theni  the  States  said,  "There  shall  be  no  measure- 
ment," for  measurement  presupposes  a  standard,  which  is  possible  only  by 
co-operation. 

This  attitude  is  now  being  very  generally  recognized  as  fallacious  and  \ 
inadequate,  inasmuch  as  it  offers  no  inducement  for  a  solution  of  the  problem 
of  equitable  rating.  State  authorities  speak  of  these  laws  as  follows:  "If 
there  are  any  instances  of  anti-compact  laws  having  served  to  reduce  the  cost 
of  fire  insurance  anywhere,  I  have  failed  to  find  them.  *  *  *  From  general 
observation  I  am  convinced  that  a  rate-controlling  compact  or  monopoly  never 
existed  in  the  fire  insurance  field.  *  *  *  j  think  we  can  safely  set  it  down 
as  a  fact  that  the  condition  of  free  and  open  competition  sought  to  be  retained 
by  the  passage  of  anti-compact  laws  has  promoted  rather  than  prevented  high 
fire  insurance  rates."""  "Inequality  and  injustice  must  necessarily  result  from 
the  operation  of  this  system.  *  *  *  i^  my  opinion  competition  in  fire  insur- 
ance rates  is  illogical,  opposed  to  sound  public  policy  and  undesirable  from 
every  standpoint."""'  The  statement  of  the  Merritt  Commission  of  New  York 
State  to  investigate  fire  insurance  may  be  summarized  as  follows: 

(1)  The  making  of  equitable  rates  demands  co-operation. 

(2)  Open   competition  weakens  the  protection  given  and  eliminates  the 

smaller  companies. 

(3)  The  only  alternative  to  open  competition  is  combination,  not  merely 

to  make,  but  to  maintain  rates. 

(4)  The  effect  of  anti -compact  laws  has  been  not  to  bring  back  a  state. 

of  open  competition,  for  this  is  an  impossible  condition,  but  to  intro- 
duce a  weakened  substitute  for  combination,  the  selling  of  "ad- 
visory" rates  by  an  independent  rater. 

(5)  The  discrimination  in  anti-compact  States  has  become  so  offensive  that 

there  is  a  strong  movement  toward  regulation."^* 
Lack  of  space  alone  prevents  quotations  from  many  other  sources  to  the  same 
effect."*^ 

The  results  of  all  the  State  rating  laws  were  very  similar.  Kentucky 
furnishes  the  most  recent  illustration.  After  the  rejection  of  the  companies' 
substitute  bill  giving  the  Insurance  Commissioner  power  over  rates,  the  latter 
threatened  to  withdraw  from  the  State  in  a  body.  A  committee  of  leading 
underwriters  from  Hartford,  New  York  and  Chicago  conferred  with  the  Gov- 


<"^  Fire  Marshal  Peterson,  of  Minnesota.  See  A.  F.  Dean,  "State  Regulation  in  the 
Light  of  Experience,"  Chicago,  1909,  p.  9. 

<'='  Thomas  B.  Love,  Insurance  Commissioner  of  Texas.  See  A.  F,  Dean,  "State 
Regulation,"   Chicago,   1909,   p.   9. 

f'3)  Report  of  Joint  Legislative  Committee  of  New  York  to  investigate  Insurance. 
Submitted   February  1,   1911,   pp.    76,   77. 

<"*  W.  X.  Johnson,  address  at  Nashville,  Tenn.,  January  30,  1909;  C.  C.  Nadal,  "In- 
surance Rate-Making  Associations."  Fidelity  and  Casualty  Co.  of  New  York, 
1912;  Attorney  General  Straus'  advice  to  Governor  Crothers  of  Maryland,  in  re 
the  petition  to  proceed  against  the  Association  of  Fire  Underwriters  of  Balti- 
more; William  Emmet,  Superintendent  of  Insurance,  New  York,  Report  for  1913. 


ernor,  and  while  meetings  to  consider  the  situation  were  being  held  a  $150,000 
fire  occurred  at  Hogdensville,  Ky.,  in  which  23  buildings  were  destroyed  while 
covered  only  by  $50,000  insurance.  Most  of  the  owners  were  unable  to  build 
without  reimbursement  for  their  loss  and  were  unable  to  obtain  loans  without 
insurance  protection. 

Louisville  banks,  anxious  as  to  their  security,  requested  information  from 
borrowers  as  to  the  value  of  their  merchandise,  the  amount  of  insurance  car- 
ried, the  amount  maturing  in  each  month  until  October  and  what  arrangements, 
if  any,  had  beep  made  for  replacing  this  insurance. 

By  March  10  forty-seven  companies  are  reported  to  have  withdrawn  from 
the  State^"*  and  two  weeks  later  industrial  concerns  were  considering  the  re- 
moval of  their  places  of  business  to  other  States.  There  was  estimated  to  be  in 
bond  in  the  State  alcoholic  liquor  valued  at  $162,000,000,  represented  by  storage 
receipts  which,  with  insurance  policies  attached,  were  pledged  as  collateral  for 
loans.  The  banks  desired  these  loans  liquidated,  if  further  insurance  could  not 
be  obtained,  and  whiskey,  tobacco  and  other  commodities  were  not  acceptable 
as  collateral  for  proposed  loans  without  insurance.  Commercial  credit  was  re- 
stricted by  manufacturers,  wholesalers  and  banks. ^"" 

The  pressure  by  business  interests  was  so  great  that  a  conference  was  held 
in  April,  1914,  for  the  purpose  of  having  the  State  and  the  companies  make 
such  concessions  as  would  enable  the  latter  to  resume  business.  As  the  com- 
panies' demand  was  non-enforcement  of  the  Glenn-Greene  Amendment  and  the 
State  would  offer  no  concessions  of  this  nature  it  was  a  flat  failure/"'  In  June 
an  agreem.ent  was  reached  containing  the  following  important  features: 

(1)  The  Business  Men's  Committee  would  enter  suit  to  test  the  constitu- 
tionality of  the  law  and  the  Insurance  Board  would  not  enforce  the  provisions  of 
the  Glenn-Greene  Amendment  until  the  question  of  constitutionality  had  been 
determined  by  the  courts.  (2)  The  Governor  would  appoint  a  committee,  one 
member  to  be  selected  by  the  State  Insurance  Board,  one  member  by  the  Na- 
tional Board  of  Fire  Underwriters,  and  one  member  by  the  Committee  of  Busi- 
ness Men,  to  make  an  exhaustive  study  of  State  laws  regulating  rates  with  a 
view  to  formulating  legislation  on  the  subject.  (3)  The  Actuarial  Bureau  would 
furnish  memoranda  of  remediable  defects  to  the  State  Insurance  Board  on  risks 
rated  hereafter,  the  Board  agreeing  to  refrain  from  calling  on  the  companies  or 
the  Bureau  for  copies  of  surveys  or  classification  figures  except  to  test  the 
accuracy  of  the  application  of  a  schedule.  (4)  All  companies  which  had  with- 
drawn from  the  State  would  be  permitted  to  resume  business  without  the  appli- 
cation of  any  penalty.  (5)  Rates  would  be  reduced  by  the  Actuarial  Bureau 
wherever  improvements  were  made.  (6)  The  Business  Men's  Committee  would 
guarantee  the  faithful  execution  of  the  agreement.  Pursuant  to  this  under- 
standing, the  companies  resumed  business  in  Kentucky,  and  the  Circuit  Court,  on 
June  12,  held  the  Act  unconstitutional  and  issued  a  temporary  order  restraining 
its  enforcement. 


^'5>  U.    S.    Review,   March   12,    1914.     Twenty  had   withdrawn   on   March 

<'6>  U.  S.  Review,  March  26,  1914. 

<"'  U.  S.  Review,  April  23  and  30,  1914. 

64 


In  Missouri  similar  events  transpired.  After  a  long  dispute  the  State 
finally  realized  the  impossibility  of  imposing  such  onerous  burdens  on  the 
companies  and  agreed  that  the  Orr  Law,  passed  in  1913,  should  not  be  en- 
forced pending  an  investigation  by  a  commission.  The  Commission's  report  in 
1915  formed  the  basis  of  a  proposed  law  of  the  type  next  to  be  described.*"" 

The  foregoing  description  of  State  rating  laws  makes  it  apparent  that 
these,  although  possessed  of  proper  purposes,  namely  publicity,  protection  of 
the  public  and  prevention  of  discrimination,  are  stronger  medicine  than  the 
disease  requires.  They  are  but  one  step  in  the  development  of  a  logical,  rea- 
sonable treatment  of  the  rate  question.  The  power  to  revise  is,  in  the  last 
analysis,  the  power  to  establish;  we  may  consider  in  the  same  place,  there- 
fore, the  objections  to  the  laws  which  provide  for  the  revision  or  fixing  of 
rates  by  State  boards.  The  following  are  alleged  to  be  the  difficulties  and 
evil  results  of  State  rating: 

(1)  It  is  contended  that  they  interfere  with  freedom  of  contract  with  re- 
spect to  a  business  which  has,  as  we  have  seen,  been  held  by  some  courts  to  be 
of  a  private  and  not  of  a  public  nature.  This  view  was  very  clearly  stated  in 
the  companies'  brief  in  connection  with  the  Kentucky  law."^* 

"Has  the  State  the  power  or  the  legal  right  to  fix  the  price  at  which  a 
purely  private  corporation  shall  sell  its  commodities  ? 

"The  test  of  whether  a  use  is  public  or  not  is  whether  a  public  trust  is 
imposed  upon  the  property,  whether  the  public  has  a  legal  right  to  the  use 
which  cannot  be  gainsaid  or  withdrawn  at  the  pleasure  of  the  owner. 

"The  business  of  fire  insurance  is  not  a  public  business,  and  it  is  not  im- 
pressed with  a  public  use,  but,  on  the  contrary,  it  is  a  private  business,  trans- 
acted by  purely  private  companies. 

"State  regulation  of  the  rates  and  charges  of  purely  private  corporations, 
or  private  individuals,  who  transact  a  private  and  not  a  public  business,  is 
clearly  prohibited  by  the  Fourteenth  Amendment  to  the  Constitution." 

(2)  It  is  unfair  for  the  State  to  limit  the  amount  which  the  companies 
may  collect  in  premiums,  without  guaranteeing  them  against  loss.  If  the 
State  has  the  privilege  of  deciding  what  rates  are  not  exorbitant,  it  should  also 
assume  the  burden  of  recompense  if  it  has  fixed  rates  which  are  inadequate.'^' 
As  stated  by  Mr.  George  W.  Babb:  "It  appears  to  me  to  be  self-evident  that 
whoever  pays  the  losses  should  make  the  rates,  and  whoever  makes  the  rates 
should  pay  the  losses.  If  the  State  makes  the  rates  the  State  should  pay  the 
losses  and  take  the  premiums.  If  the  State  makes  maximum  rates  for  the  in- 
surance companies,  leaving  the  latter  to  pay  the  loss,  the  State  should  guar- 
antee a  reasonable  profit  on  the  business.'"-*"'  It  may  say  that  any  dissatisfied 
underv/riter  may  withdraw,  but  the  results  of  this  attitude  have  been  de- 
scribed. 

(3)  The  companies  have  urged  that  it  is  unfair  to  require  them  to  con- 


<">  Report  of  Commission  to  Investigate  Insurance,   Missouri,   1915. 
<">  The  analysis  given  appeared  in  the  United  States  Review. 

(M)  President's   address,    Proceedings   of   46th   Annual   Meeting  of   the   National   Board 
of  Fire  Underwriters,   May.   1912,  p.   28. 

65 


tribute  through  taxation  thousands  of  dollars  to  support  a  State  rating  board, 
which  will  be  of  no  additional  benefit  to  them  and  the  cost  of  which  may 
exceed  that  of  the  method  which  they  privately  maintained.  Thus  in  Ken- 
tucky a  fund  of  $25,000  was  required  to  be  pro-rated  among  the  companies, 
and  this  was  considered  by  them  as  confiscation  of  property  without  due 
process  of  law/'''^ 

(4)  Political  influence  may  exert  a  power  for  the  benefit  of  special  classes 
which  should  be  used  in  obtaining  justice  for  all.  The  New  York  Legislative 
Committee  in  its  report  said:^"*  "This  is  a  very  dangerous  power;  it  is  con- 
ceivable that  it  might  be  used  for  political  purposes;  at  any  rate  he  who 
exercised  the  power  would  have  effective  pressure  brought  to  bear  on  him 
from  only  one  direction,  that  is,  to  reduce  the  rates,  while,  at  least  in  certain 
emergencies,  the  situation  might  demand  an  increase." 

(5)  The  supervision  of  the  business,  although  requiring  ability  and  ex- 
perience, will  generally  devolve  on  those  whose  only  qualification  is  their  par- 
ticipation in  political  activities.  To  make  the  rates  the  State  must  collect 
statistics,  presumably  from  the  companies;  employ  experts,  presumably  ex- 
perienced insurance  men;  and  use  schedules,  either  those  now  used  by  the  com- 
panies or  their  own  expensive  substitutes.  "The  situation  must  be  very  aggra- 
vated that  would  warrant  the  State  in  assuming  such  an  extended  and  tech- 
nical piece  of  work."*^*  "Our  investigation  leads  us  to  the  conclusion  that 
any  attempt  by  the  State  to  assume  the  function  of  creating  or  originating 
rates  for  fire  insurance  would  be  a  serious  mistake. "^"*^ 

(6)  The  inequalities  and  lack  of  relation  present  in  State  and  municipal 
taxes  afford  a  presumption  that  the  fire  tax  will  be  inequitably  distributed. 

(7)  The  compilation  of  statistics  is  possible  only  with  the  co-operation  of 
underwriters. 

(8)  If  the  State  assumed  entire  control  of  the  business  it  could  not  accom- 
plish its  objects,  judging  from  the  results  in  other  countries  where  State  insur- 
ance has  been  tried.  Their  experience,  it  is  claimed,  shows  that  insurance 
conducted  by  the  State  neither  reduces  rates  nor  yields  a  profit.^"'*  What  can 
be  accomplished  then  merely  by  the  control  of  rates? 

(9)  Average  and  distribution  are  bases  of  fire  insurance  and  rates  should 
not  be  founded  on  the  experience  of  the  separate  States.  The  theory  of  the 
Texas  Board  at  the  outset  was  that  Texas  premiums  should  pay  for  Texas 
losses.*""*  The  issue  correctly  stated  would  be,  shall  Texas  policyholders  evade 
liability  for  losses  in  other  States  and  outside  policyholders  help  to  pay  Texas 
losses?     The  New  York  Committee  report  states:    "Insurance  is  based  on  gen- 


^21)  United   States  Review,   April  4,  1912. 

<22)  Report  of  the  Joint  Committee  of  the  Senate  and  Assembly  of  New  York  on  Insur- 
ance Investigation,  February  1,  1911. 

^22)  Ibid.,  p.  52. 

f-*>  Report  of  Illinois  Fire  Insurance  Commission,   1911,   p.   74. 

<25)  A.  E.  Wall,  "Some  Popular  Fallacies  with  Regard  to  Fire  Insurance,"  "The  Mar- 
ket World  and  Chronicle"  (now  "The  Economic  World"),  November  8,  1913, 
p.  607. 

<«>  United  States  Review,  March  14.  1912. 

66 


eral  average;  no  one  locality  is  sufficient  for  this,  not  even  a  State,  not  even 
the  United  States  in  the  case  of  large  conflagrations.  If  rate-making  were 
lodged  with  the  State  and  the  experience  of  that  State  had  been  favorable,  the 
tendency  would  be  to  make  rates  purely  upon  this  experience.  The  most  serious 
effect  of  this  would  be  that,  in  case  of  a  large  conflagration,  it  would  be  im- 
possible for  a  company  to  recoup  itself,  for  each  State  in  standing  upon  its  own 
experience  would  refuse  to  contribute  to  any  outside  loss;  the  result  would 
be  that  the  State  in  which  the  conflagration  occurred  would  have  to  pay  the 
entire  loss.  This  would,  of  course,  break  down  the  very  first  principle  of  in- 
surance, for  one  State  is  insufficient  to  stand  the  shock  of  a  large  conflagra- 
tion." *''^'  Notwithstanding,  the  danger  of  a  single  city's  experience  being 
taken  as  a  basis  appears.  In  April,  1912,  the  City  of  Austin,  Texas,  applied 
to  the  Texas  Insurance  Rating  Board  for  a  compulsory  reduction  of  its  rates 
to  a  lower  plane  than  those  of  any  other  city  in  the  State.  The  argument 
advanced  was  that  the  rates  for  Austin  should  be  based  upon  the  city's  own 
experience  and  that  citizens  of  Austin  should  not  be  compelled  to  pay  pre- 
miums sufficient  to  take  care  of  fire  losses  in  other  communities.  On  the 
other  hand,  in  some  States  the  fallacy  of  such  an  arrangement  is  realized. 
Mr.  F.  W.  Potter  said:^"^*  "I  am  more  than  ever  persuaded  that  it  is  the  duty 
of  those  States  having  rational  insurance  laws,  and  making  a  fair  contribution 
to  the  common  fund,  to  prohibit  by  law  the  admission  of  companies  which 
operate  in  States  where,  under  the  statute,  fire  insurance  is  not  permitted  to 
exercise  its  functions  with  reasonable  freedom,  nor  to  collect  a  premium  com- 
mensurate with  the  hazards  in  such  States." 

This  awakening  of  some  States  necessarily  has  its  disadvantages  from  the 
companies'  viewpoint.  They  seem  to  be  between  the  upper  and  lower  mill- 
stones— compelled  to  do  business  in  some  States  at  inadequate  premiums  and 
prevented  from  collecting  any  at  all  in  others  because  of  it.  It  would  seem, 
therefore,  that  State  rating  laws  serve  only  to  reduce  premiums  and  that  to 
such  an  extent  as  to  jeopardize  the  safety  of  the  companies  and  to  cause  them 
to  withdraw  from  a  business  without  profit.  While  the  State  rating  boards 
have  the  power  to  correct  the  evils  which  have  been  stated  to  exist,  it  would 
be  advisable  to  attain  this  end  by  a  less  dangerous  method. 

In  brief,  State  rating  laws  appear  to  be,  in  the  first  place,  a  stronger 
remedy  than  the  disease  requires  and,  secondly,  one  which,  even  as  it  cures, 
creates  new  ills.  It  would  be  advisable  to  retain  the  economic  advantages 
of  associations  and  to  eliminate  their  objectionable  features  by  less  stringent 
measures.  This  is  provided  for  by  laws  similar  to  that  of  New  York,  West 
Vrrginia  and  North  Carolina.*^'     Such  acts  stop  short  of  actually  fixing  insur- 


<">  Report  of  New  York  Legislative  Investigating  Committee,  1911,  p.  52.  See  also 
E.  G.  Richards,   "Experience  Grading  and  Rating  Schedule." 

<2s>  Annual  Report,  Commissioner  of  Insurance,  1912.  Also  see  New  York  Journal  of 
Commerce.  August  25,  1913,  and  "The  Market  World  and  Chronicle"  (now 
"The   Economic   World"),    July   5,   1913. 

«2n)  New  York  Laws  1909,  Chap.  33,  Sect.  41,  as  amended  by  Laws  1911,  Chap.  460 
and  Laws  1912.  Chap.  175.  North  Carolina,  Laws  1913.  Chap.  145.  West  Vir- 
ginia. Acts  1913.     Other  States  have  since  adopted  this  form  of  law. 

67 


ance  rates,  and  avoid  all  of  the  objections  and  disadvantages  inherent  therein. 
They  allow  the  associations  which  have  been  so  beneficial  in  the  past  to  exist 
and  yet  subject  them  to  the  closest  supervision  by  the  Insurance  Department. 

Laws   Providing   for   Supervision. 

The  New  York,  West  Virginia  and  North  Carolina  laws  are  identical 
and  provide  that  corporations,  associations  and  bureaus  for  suggesting,  approv- 
ing or  making  rates  to  be  used  by  more  than  one  underwriter  shall: 

(1)  File   with  the   Insurance   Commissioner   a   copy   of   their  articles   of 

agreement,    by-laws    and    a    statement    of    business    addresses    and 
names  of  members. 

(2)  Furnish  such  other  information  as  the  Commissioner  may  require. 

(3)  Submit  to  visitation,  supervision  and  examination  by  the  Commissioner 

as  often  as  he  deems  expedient  and  at  least  once  every  three  years. 

(4)  File  rates  and  schedules  at  request  of  the  Commissioner. 

(5)  Keep  records  of  proceedings  and  upon  request  furnish  the  insured  with 

information  as  to  his  rate  and  a  copy  of  the  schedule  by  which  his 
property  was  rated. 

(6)  Provide  means  of  hearing  interested  parties  before  their  governing 

or  rating  committees  or  other  proper  authorities. 
The  associations  and  bureaus  are  prohibited  from: 

(1)  Specifying  that  the  rates  depend  upon  placing  the  whole  or  a  specified 

amount  of  insurance  at  such  rates. 

(2)  Requiring  that  all  insurance  be  taken  with  subscribers  to  such   or- 

ganizations. 

(3)  Discriminating  in  rates.    The  Commissioner  may  hear  cases  and  order 

discriminations    removed    and    they    shall    not    be    removed    by    an 
increase  in  rates  unless  justifiable. 

Whereas  other  laws  prohibited  co-operation,  even  attempted  to  enforce 
competition  and  took  away  the  right  of  the  companies  to  say  at  what  price 
they  would  sell  insurance,  these  acts  permit  and  recognize  associations  with 
all  their  benefits,  on  the  one  hand,  and  prohibit  abuses,  on  the  other.  In  New 
York  all  complaints  seem  to  have  been  promptly  investigated  and  evils  are 
being  corrected.  An  extensive  investigation  of  the  most  important  association 
in  New  York  was  conducted,  which  analyzed  its  deficiencies  at  length. 

The  report  of  the  Merritt  Committee  of  New  York,  acknowledged  to  be 
the  fairest  and  most  intelligent  summary  of  the  business  yet  given,  said: 

"It  is,  therefore,  recommended  that  no  anti-compact  bill  be  passed,  but 
that  in  place  thereof  a  statute  be  enacted  that  will  permit  combination  under 
State  regulation,  such  regulation  to  stop  short  of  actually  fixing  the  price  at 
which  the  companies  shall  sell  their  insurance,  but  which  will  be  of  such  a 
positive  nature  that  all  forms  of  discrimination  in  rates  will  cease."  *  *  *  '^"^ 
The  recent  report  of  the  Missouri  Investigating  Committee  states:  "A  rating 
or  actuarial  bureau  should  be  open  for  membership  to  all  authorized   com- 


^'''>  Report  of  the  Joint  Committee  of  the  Senate  and  Assembly  of  New  York,  February 
1,  1911,  p.  125. 

68-. 


panics     *     *     *     subject    to    visitation,    inspection    and    examination    of    the 
Superintendent  of  Insurance."*'"     The  report  of  the  North  Carolina  Investigat- 
ing Committee  recognized  in  part  the  advantages  of  the  association/"-'     A  vice- 
president  and  counsel  of  one  of  the  large  companies  wrote:'"'     "There  would 
seem  to  be,  however,  a  middle  course  between  the  two  extremes  of  State  rate- 
making,  on  the  one  hand,  with  all  the  consequent  defects     *     *     *   j  and,  on 
*^h«.^ther  hand,  complete  company  control  of  rate-making  without  the  steady- 
ing influencef  i.-xj^H^  control  of  laws  and  State  supervision  to  hold  the  rate- 
making  body  up  to  a  full  avw*  of  responsibility  for  its  action  to  the  repre- 
sentatives of  the  people.     The  »cessary  joint  control  and  balancing  of  in- 
iiuc^nce  can,  I  think,  be  secured  ,y  leaving  the  companies'  selection  of  the 
person  or  pexi^l'^'^ns  who  shall  make-ates,  but  giving  to  the  Superintendent  of 
Insurance  the  power  <'    "  -  the  office  and  methods  of  the  rate- 

making   body,     *     *  compel   removal   of   discrimination   in 

rates,     *     *     *     jurisdiction  to  review  complaints  that  the  schedule  used  by 
the  rate-making  body  has  not  accurately  applied  to  a  particular  risk." 

Since  this  study  was  begun  the  principle  of  association  with  adequate 
regulation  has  received  greater  recognition.  Prior  to  1915  six  States,  New 
York,  New  Jersey,  West  Virginia,  North  Carolina,  Washington  and  Kentucky, 
had  adopted  legislation  of  this  nature  and  during  the  past  year  Pennsyl- 
vania, Michigan,  Missouri,  Minnesota,  Iowa  and  Oklahoma  enacted  such  laws. 
Kentucky  and  Missouri,  which  have  tried  radical  prohibitory  legislation,  will 
be  noted  in  this  list. 

In  foreign  countries  little  objection  has  been  made  to  insurance  associa- 
tions making  rates.  In  England  one  tariff  association  of  practically  all  com- 
panies has  existed  since  1858,  which  determines  rates  for  all  important  classes 
of  property  and  it  has  never  been  found  necessary  to  organize  mutuals  in 
order  to  reduce  rates.  The  same  situation  exists  on  the  Continent.^^'  In  Ger- 
many the  private  fire  insurance  companies  formed  a  "Kartell,"  or  association, 
in  1899,  which  has  almost  completely  done  away  with  competitive  rate- 
making.'^' 

After  a  discussion  of  various  aspects  of  fire  insurance  rates  and  under- 
writers'  associations   a   general   summary   of  the   conclusions   reached   would    /^ 
*reem  to  be  advisable.  C^ 

(1)  Fire  insurance  rates  are  receiving  great  consideration  at  the  present 
time  and  are  the  greatest  problem  of  the  insurance  business. 

(2)  Underwriters'  associations,  far  from  being  useless  or  vicious,  have 
certain  definite  economic  functions. 

(3)  Certain  evils  are  complained  of,  some  of  which  are  due  to  competition 
and  others  to  lack  of  regulation. 

(4)  The  evils  complained  of  will  not  be  removed  by  prohibiting  combina- 
tions or  by  the  State  assuming  price-fixing  powers. 

(5)  Rational  regulation,  arising  from  careful  investigation,  and  knowledge 
of  the  principles  involved,  of  those  associations  which  have  hitherto  performed 
their  functions  with  reasonable  success,  will  yield  the  greatest  benefit  to  under- 
writers and  the  public/^** 


<-^'>  Report  of  Findings  and  Recommendations  of  the  Missouri  Fire  Insurance  Com- 
mission.  1915. 

*•->  1915,   p.   7.    • 

<"3)  David  Rumsey,  "A  Suggestion  of  a  Metliod  for  the  Control  of  Fire  Insurance 
Rates,"  "The  Market  Woild  and  Chronicle"  (now  "The  Economic  World"). 
December  6,   1913,   p.   740. 

<■'••>  L.  W.  Zartman,  "Discrimination  and  Co-operation  in  Fire  Insurance  Rating,"  Yale 
Readings  in  Insurance,  Yale  Univtrsity  Press,  New  '"ivfu.  »■  lijff 

<"•'•>  Fritz  Brauer,  "Wirkungen  des  Feii  <  rung  Kartells." 

•■'^>  As   is   usually   the   case  with  cum.  wnic   problems   the   biblidiii  ilrLs 

subject  is  scattered  and  not  eavsii.\  ai  cessible.  The  follo'^^fe  is  a  list  oi  ]ijac- 
tically  all  the  books,  rejiorts  and  periodicals  whicH-'^''^  ^frectiy  i^rtain  \o  the 
subject: 

BIBLIOGRA^'HY.-iPOOKS. 

American  Corporation  Manual.     J.  S.  Park'  '  i  m  Mimiial  c,,..  ;;4  Nas- 

sau St.,  New  York. 

Clement,  G.  A.  Law  of  Fire  Insurance,  litos.  Vol.  2.  pp.  615-617.  Notes  on  Asso- 
ciations. 

Dean,  A.  F.     "Fire  Rating  as  a  Science."     J.  M.  Murphy,  Chicago,  1901. 

Deitch,  G.  Digest  of  Insurance  Cases  (published  annually).  Bobbs-Merrill  Co.,  In- 
dianapolis,  1913,   1912. 

Hardy,  E.  R.     "Fire  Insurance"  in  Modern  Business  Series,  Vol.  VIII,  New  York.   1911. 

Huebner,  S.  S.  "Property  Insurance,"  Chaps.  XVI  and  XVII.  D.  Appleton  &  Co., 
New  York,  1911. 

Noyes.     Intercorporate  Relations,   pp.   763   et  seq. 

Richards,  E.  G.     "Experience  Grading  and  Rating  Schedule." 

Standard  Universal  Schedule  for  Rating  Mercantile  Buildings,  Continental  Insurance 
Co.,  New  York. 

PAMPHLETS,  ARTICLES  AND    REPORTS. 

Affeld,  F.  O.  "State  Fire  Insurance  Rating."  Hamburg-Bremen  Fire  Insurance  Com- 
pany, New  York. 

Blake,  Frank.  Superintendent  of  Insurance,  Missouri.     Report  for  1912. 

Commonwealth  of  Pennsylvania.  Bill  of  Complaint,  Commonwealth  vs.  AUemania  Fire 
Insurance  Co.,  et  al..  Court  of  Common  Pleas  No.  2,  of  Allegheny  County,  Pa. 

Dean,   A.  F.     "Classification."     Chicago,  1913. 

Dean,  A.  F.  "Classified  Experience,"  a  paper  prepared  for  the  Classification  Com- 
mittee of  the  National  Association  of  State  Insurance  Commissioners,  Chicago,  1912. 

Dean,  A.  F.  "Standardization."  An  address  at  42d  Annual  Meeting  of  the  Fire  Un- 
derwriters Association  of  the  Northwest. 

Dean,  A.  F.  "State  Regulation  of  Fire  Insurance  in  the  Light  of  Experience."  Chi- 
cago,. 1909. 

Dean,  A.  F.  "Fire  Hazard — Is  It  Measurable?"  Committee  on  Publicity  and  Education, 
Chicago,  1910. 

Emmet,  R.   T.,   Superintendent  of  Insurance  of  New  York.     Report  for  1913. 

Fortai^sh,  G.  T.  "Notes  on  Rates  and  Rate-making,"  a  lecture  before  the  Insurance 
Library  Association  of  Boston,  1912. 

Hexamer,  C.  A.  "Rates  and  Schedule  Rating."  Annals  of  American  xVcademy  of 
Political  and   Social   Science,   September,   1905. 

Illinois  Fire  Insurance  Commission,  Report  of,  to  the  Senate  and  House  of  Repre- 
sentatives,  47th   General  Assembly,   January  4,   1911. 

.Johnson,  W.  N.  Address  before  a  Conference  of  Tennessee  Business  Men  at  Nash- 
ville, Tenn.,  .January  30,  1909. 

Ivremer,  J.  B.  "The  Agency."  Address  before  Insurance  Society  of  New  York,  91st 
Meeting.     Pu?  lished  January,  1914. 

Lock,  Frank.     "Some  Methods  of  the  Fire  Insurance  Business."     Address  before  the 

70 


.  Fire  Insurance  Club  of  Chicago.     In  New  York  Journal  of  Commerce,   Marcli   25, 
1914. 

.Missouri  Legislature.     Report  of  the  Fire  Insurance  Commission,   1915. 

Xadal,  Charles  C.  "Insurance  Rate-Making  Associations."  Fidelity  and  Casualty  Co. 
of  New  York. 

National  Board  of  Fire  Underwriters.  Proceedings  46th  Annual  Meeting,  1912;  Pro- 
ceedings 47th  Annual  Meeting,  1913:  Proceedings  4Sth  Annual  Meeting,  1914;  Pro- 
ceedings 49th  Annual  Meeting,   1915. 

National  Board  of  Fire  Underwriters.  Committee's  Report  on  explanation  of  prin- 
ciples and   methods  of  fire  insurance.     October  1,   1899. 

National  Board  of  Fire  Underwriters.  Report  of  Special  Committee  on  Uniform  Classi- 
fication  of  Fire  Insurance  Experience,   1913. 

Xational  Convention  of  Insurance  Commissioners,  Proceedings  of. 

National  Fire  Protection  Association.  "Story  of  the  National  Fire  Protection  Asso- 
ciation."    National  Fire  Protection  Association,  Boston,  Mass. 

New  York  Fire  Insurance  Exchange.     Annual  Reports  of  the  Manager. 

New  York  Insurance  Department.  "Report  on  Examination  of  New  York  Fire  Insur- 
ance  Exchange,"    by   Samuel   Deutschberger,   .luly   21.    1913. 

New  York  Legislature.  Report  of  Joint  Committee  of  Senate  and  Assembly  of  New 
York  to  investigate  the  affairs  of  insurance  companies.  Transmitted  to  the  Legis- 
lature February  1,  1911. 

North  Carolina  Legislature.     Report  of  Investigating  Committee  on  Insurance,  1915. 

Pennsylvania  Legislature.     Report  of  Joint  Legislative  Committee,  1915. 

Potts,  R.  M.  Report  to  Governor  of  Illinois  on  Investigation  of  Fire  Insurance  in 
Illinois,  1915. 

Richards.  E.  G.  "Classification — Discrimination."  address  before  Insurance  Society  of 
New  York,  1913. 

Richards,  E.  G.  "Why  I  Believe  in  Rate-making  from  Classified  Experience,"  address 
before  Insurance  Library  Association  of  Boston,  1916. 

Robb,  W.  D.  "New  York  Fire  Insurance  Exchange."  Popular  Insurance  Magazine, 
Januarj%   1911. 

Rumsey,  David.  "A  Suggestion  of  a  Method,  for  the  Control  of  Fire  Insurance  Rates." 
"The  Market  World  and  Chronicle"  (now  "The  Economic  World"),  December  6, 
1913,   p.   722. 

Rumsey,  David.  "The  State  and  the  Insurance  Company."  An  address  reported  in 
New  York  Journal  of  Commerce,  March  25,  1914. 

Smith,  J.  G.  "Fire  Insurance:  Its  History,  Principles  and  Problems,  with  Special 
Reference  to  Conditions  in  North  America."  A  lecture  before  the  Insurance 
Institute  of  Toronto,   Canada,  January  15,  1914. 

Wall.  A.  E.  "Some  Popular  Fallacies  with  Regard  to  Fire  Insurance."  "The  Market 
World  and   Chronicle"    (now   "The  Economic  World"),   November  8,   1913. 

Wiederhold,  Louis,  Jr.  "Underwriters'  Associations  and  Their  Benefit  to  t/he  Public." 
Bulletin  of  the  Fire  Insurance  Society  of  Philadelphia,  Special  Supplement,  May, 
1912. 

Zartman,  Lester  W.  "Discrimination  and  Co-operation  in  Fire  Insu'rance  Rating." 
Yale  Readings  in  Insurance,  Chap.  XI.     Yale  University  Press,  New  Haven,  1909. 

CONSTITUTIONS,    BY, LAWS    AND    RULES    OF    VARIOUS    ASSOCIATIONS, 

SUCH    AS: 

Board    of    Fire    Underwriters    of    Allegheny    County.      Constitution    and    By-Laws,    as 

amended  April  15,  1909. 
National  Board  of  Fire  Underwriters.     Constitution  and  By-Laws. 
Underwriters'  Association  of  the  Middle  Department.     Rule  Book,  April  10,  1911,  with 

revisions.  fl 

Western   Union   Rules,   special   edition   of  October,    1911,   supplemented   and   revised   to 

September,   1912. 

71 


«    r     -^    •  *^   •      S 


New  York  Fire  Insurance  Exchange  Rating  Schedules. 

New   York    Fire   Insurance    Exchange.      Handbook   of   the   New    York    Fire    Insurance 

Exchange,  July,  1910;  revised  to  January,  1914. 
Philadelphia  Underwriters'  Association.     By-Laws,  Agreements  and  Rules,  June,  1908; 

revised  to  1913. 
Rating  Schedules  of  various  associations. 

NEWSPAPERS   AND    MAGAZINES. 

"The    Economic    World"     (formerly    "The    Market    World    and    Chronicle"),    weekly. 

Chronicle  Co.,  Ltd.,  80  Wall  St.,  New  York. 
United  States  Review  (weekly),  411  Walnut  St.,  Philadelphia,  Pa. 
New  York  Journal  of  Commerce  and  Commercial  Bulletin  (daily),  32   Broadway,   New 

York. 


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